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on Contract Theory and Applications |
| By: | Hu Lu (Applied Research and Analysis Directorate, Health Canada); Yuntong Wang (Department of Economics, University of Windsor) |
| Abstract: | This paper considers a trading problem on a network with incomplete information. We consider a simple water trading problem in which three agents are located in a linear order along a river. Upper stream agents can sell some amount of the water to their downstream but not the other way around. The middle agent can be both a seller and a buyer. Agents have private information on their utility of water, which we assume is non- linear. We ask if there is an efficient trading mechanism for the allocation of water. We show that if agents have highly asymmetric initial endowments of water, incentive-compatible, individually rational, budget-balanced mechanisms exist that are also ex-post efficient. |
| Keywords: | Network; Incomplete Information; Water Trading; Mechanism Design. |
| JEL: | C72 D82 |
| Date: | 2014–10–27 |
| URL: | http://d.repec.org/n?u=RePEc:wis:wpaper:1405&r=cta |
| By: | Tsuyoshi Takahara |
| Abstract: | We analyze a rationale for official authorization of patient dumping in the prospective payment policy framework. We show that when the insurer designs the healthcare payment policy to let hospitals dump high-cost patients, there is a trade-off between the disutility of dumped patients (changes in hospitals' rent extraction due to low-severity patients) and the shift in the level of cost reduction efforts for high-severity patients. We also clarify the welfare-improving conditions by allowing hospitals to dump high-severity patients. Finally, we show that if the efficiency of the cost reduction efforts varies extensively and the healthcare payment cost is substantial, or if there are many private hospitals, the patient dumping policy can improve social welfare in a wider environment. |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:dpr:wpaper:0891r&r=cta |
| By: | Marius Andrei Zoican; Lucyna Anna Gornicka |
| Abstract: | A banking union limits international bank default contagion, eliminating inefficient liquidations. For particularly low short-term returns, it also stimulates interbank flows. Both effects improve welfare. An undesirable effect arises for moderate moral hazard, since the banking union encourages risk taking by systemic institutions. If banks hold opaque assets, the net welfare effect of a banking union can be negative. Restricting the banking union mandate restores incentives, improving welfare. The optimal mandate depends on moral hazard intensity and expected returns. Net creditor countries should contribute most to a joint resolution fund, less so if a banking union distorts incentives. |
| JEL: | G15 G18 G21 |
| Date: | 2014–10–29 |
| URL: | http://d.repec.org/n?u=RePEc:jmp:jm2014:pzo33&r=cta |
| By: | Josse Delfgaauw (Erasmus University Rotterdam); Michiel Souverijn (Erasmus University Rotterdam, the Netherlands) |
| Abstract: | When verifiable performance measures are imperfect, organizations often resort to subjective performance pay. This may give supervisors the power to direct employees towards tasks that mainly benefit the supervisor rather than the organization. We cast a principal-supervisor-agent model in a multitask setting, where the supervisor has an intrinsic preference towards specific tasks. We show that subjective performance pay based on evaluation by a biased supervisor has the same distorting effect on the agent's effort allocation as incentive pay based on an incongruent performance measure. If the principal can combine incongruent performance measures with biased supervision, the distortion in the agent's efforts is mitigated, but cannot always be eliminated. We apply our results to the choice between specialist and generalist middle managers, where a trade-off between expertise and bias may arise. |
| Keywords: | subjective performance evaluation, middle managers, incentives, multitasking |
| JEL: | J24 M12 M52 |
| Date: | 2014–08–25 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20140115&r=cta |
| By: | Chunmei Lin (Erasmus University Rotterdam); Massimo Massa (INSEAD, France); Hong Zhang (INSEAD, France, and Tsinghua University, Singapore) |
| Abstract: | We hypothesize that poor country-level governance, which makes public information less reliable, induces fund managers to increase their use of semi-public information. Utilizing data from international mutual funds and stocks over the 2000-2009 period, we find that semi-public information-related stock rebalancing can be five times higher in countries with the worst quality of governance than in countries with the best. The use of semi-public information increases price informativeness but also increases information asymmetry and reduces stock liquidity. It also intensifies the price impact and liquidity crunch during the recent global financial crisis. This paper was accepted for publication in the Review of Financial Studies . |
| Keywords: | Mutual Funds, Information Diffusion, Country-Level Governance, Semi-public Information,Liquidity |
| JEL: | G15 |
| Date: | 2014–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20140079&r=cta |
| By: | Attar, Andrea; Mariotti, Thomas; Salanié, François |
| Abstract: | We study a nonexclusive insurance market with adverse selection in which insurers compete through simple contract offers. Multiple contracting endogenously emerges in equilibrium. Different layers of coverage are priced fairly according to the types of insurees who purchase them, giving rise to cross-subsidies between types. Riskier insurees demand greater total coverage at an increasing unit price, but the contracts offered by insurers feature quantity discounts in equilibrium. Our policy implications emphasize the need to regulate the supply side of nonexclusive insurance markets, leaving insurees free to choose their optimal level of coverage. |
| Keywords: | Insurance Markets, Multiple Contracting, Adverse Selection. |
| JEL: | D43 D82 D86 |
| Date: | 2014–10–07 |
| URL: | http://d.repec.org/n?u=RePEc:ide:wpaper:28619&r=cta |
| By: | Luca Anderlini; Dino Gerardi; Roger Lagunoff |
| Abstract: | We study the relative performance of disclosure and auditing in organizations. We consider the information transmission problem between two decision makers who take actions at dates 1 and 2 respectively. The first decision maker has private information about a state of nature that is relevant for both decisions, and sends a cheap-talk message to the second. The second decision maker can commit to only observe the message (disclosure), or can retain the option to observe the action of the first decision maker (auditing) or, at some cost, to verify the state. In equilibrium, state verification will never occur and the second decision maker effectively chooses between auditing and disclosure. When the misalignment is preferences reflects a bias in a decision maker's own action relative to that of the other - we call this an agency bias - then, in equilibrium, the second decision maker chooses to audit. Actions speak louder than words in this case. When one decision maker prefers all actions to be biased relative to the other decision maker - we call this an ideological bias - then, if the misalignment is large enough, in equilibrium the second decision maker chooses disclosure. In this case words speak louder than actions. While firms are usually characterized by agency bias, ideological bias is more common in political systems. Our results indicate that the ability to commit not to audit has value in the latter case. However such commitment is rarely feasible in the political sphere. |
| Keywords: | Auditing, Disclosure, Agency Bias, Ideological Bias |
| JEL: | C73 D63 D72 D74 H11 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:cca:wpaper:355&r=cta |
| By: | Christoph Feldhaus; Johannes Mans |
| Abstract: | We investigate whether and how an individuals' propensity to lie is affected by the social relationship between a potential liar and her/his possible victim. We argue that a shared social identity of sender and receiver increases sender's aversion to lie by raising two types of costs: the allocative and the social costs of the lie. Allocative costs should be larger in ingroup interactions because social preferences are stronger and thus losses to the receiver are weighted more heavily while social costs should be higher in closer relationships due to stricter moral rules. In contrast to our hypothesis our experimental results from a modified three-person sender-receiver game do not provide evidence that social identity affects lying behavior. While across all treatments about half of the participants send a dishonest message, we do not observe differences in lying behavior towards ingroup and outgroup members: neither with respect to allocative nor in terms of social costs. Hence, in our experiment lying behavior is robust to social identity manipulations. |
| Keywords: | Private information, deception, lying costs, social identity, experiment |
| JEL: | C91 D82 |
| Date: | 2014–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:kls:series:0076&r=cta |
| By: | Sander Renes (Erasmus University Rotterdam, the Netherlands, and University of Mannheim, Germany); Floris T. Zoutman (Norwegian School of Economics, Norway) |
| Abstract: | This paper studies the design of tax systems that implement a planner's second-best allocation in a market economy. An example shows that the widely used Mirrleesian (1976) tax system cannot implement all incentive-compatible allocations. Hammond's (1979) "principle of taxation" proves that any incentive-compatible allocation can be implemented through at least one tax system. However, this tax system is often undesirable since it severely restricts the choice space of agents in the economy. In this paper we derive necessary and sufficient conditions to verify whether a given tax system can implement a given incentive-compatible allocation. We show that when an incentive-compatible allocation is on the Pareto frontier, and/or surjective onto the choice space, a tax system that equates the marginal tax rates to the optimal wedges can implement the second best, without restricting the choice space of the agents. It follows that the Mirrleesian tax system can successfully implement the second best in the identified classes. Since the second-best allocation of welfarist planners is always on the Pareto frontier, our results (ex post) validate most tax systems proposed in the literature. Outside of the identified classes, the planner may need to restrict the choice space of agents to implement its second best in the market. This sheds new light on rules, quotas and prohibitions used in real-world tax and benefit systems. |
| Keywords: | optimal non-linear taxation, redistribution, tax system, market implementation, price mechanism, private information |
| JEL: | H21 H22 D82 H24 |
| Date: | 2014–09–11 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20140121&r=cta |
| By: | Lea Cassar |
| Abstract: | Are monetary and non-monetary incentives used as substitutes in motivating effort? I address this question in a laboratory experiment in which the choice of the job charac- teristics (i.e., the mission) is part of the compensation package that principals can use to influence agents' effort. Principals offer contracts that specify a piece rate and a charity - which can be either the preferred charity of the agent, or the one of the principal. The agents then exert a level of effort that generates a profit to the principal and a dona- tion to the specified charity. My results show that the agents exert more effort than the level that maximizes their own pecuniary payoff in order to benefit the charity, especially their preferred one. The principals take advantage of this intrinsic motivation by offering lower piece rates and by using the choice of the charity as a substitute to motivate effort. However, I also find that because of fairness considerations, the majority of principals are reluctant to lower the piece rate below a fair threshold, making the substitution between monetary and non-monetary incentives imperfect. These findings have implications for the design of incentives in mission-oriented organizations and contribute to our understanding of job satisfaction and wage differentials across organizations and sectors. |
| Keywords: | Mission, intrinsic motivation, incentives, experiment |
| JEL: | C92 J33 M52 M55 |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:zur:econwp:177&r=cta |
| By: | Laura Abrardi; Carlo Cambini |
| Abstract: | We study the optimal tariff structure that could induce a regulated utility to adopt energy efficiency activities given that it is privately informed about the effectiveness of its effort on demand reduction. The regulator should optimally offer a menu of incentive compatible two-part tariffs. If the firm's energy efficiency activities have a high impact on demand reduction, the consumer should pay a high fixed fee but a low per unit price, approximating the tariff structure to a decoupling policy, which strenghtens the firm's incentives to pursue energy conservation. Instead, if the firm's effort to adopt energy efficiency actions is scarcely effective, the tariff is characterized by a low fixed fee but a high price per unit of energy consumed, thus shifting the incentives for energy conservation on consumers. The optimal tariff structure also depends on the cost of the consumer's effort (in case the consumer can also adopt energy efficiency measures) and on the degree of substitutability between the consumer's and the firm's efforts. |
| Keywords: | Energy efficiency, demand-side regulation, decoupling, price-cap |
| JEL: | L51 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:bcu:iefewp:iefewp65&r=cta |
| By: | Jin, Xin |
| 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: | delayer, asymmetric information, promotion, slot constraint |
| JEL: | J31 M51 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:58485&r=cta |
| By: | Elisabetta Iossa; Giancarlo Spagnolo; Mercedes Vellez |
| Abstract: | PPPs have been implemented broadly around the world in the infrastructure sector -water and sanitation, transports, energy, and telecommunications- and, more recently, in the provision of public services -education, health, prisons, and water and waste management. Key aspects of the contract design, such as risk allocation and payment mechanisms, significantly affect the PPP outcomes because they affect the incentives of the public and private parties to deliver a public service that satisfies user needs. Nevertheless, contractual provisions used in practice often do not implement the efficient risk allocation. In this paper, we discuss the crucial role of the public sector in designing and imposing standardized contracts, monitoring their compliance, disclosing contractual information to the general public, and transferring risks to the private sector in order to reduce the likelihood of PPP performance failure. |
| Keywords: | Concession contracts, Incentives, Public Private Partnerships, Risk Allocation |
| JEL: | D02 D20 D82 L33 L38 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:bcu:iefewp:iefewp64&r=cta |
| By: | Berndt, Antje (Poole College of Management); Hollifield, Burton (Tepper School of Business); Sandås, Patrik (McIntire School of Commerce) |
| Abstract: | We develop an equilibrium model for origination fees charged by mortgage bro- kers and show how the equilibrium fee distribution depends on borrowers' valua- tion for their loans and their information about fees. We use non-crossing quantile regressions and data from a large subprime lender to estimate conditional fee dis- tributions. Given the fee distribution, we identify the distributions of borrower valuations and informedness. The level of informedness is higher for larger loans and in better educated neighborhoods. We quantify the fraction of the surplus from the mortgage that goes to the broker, and how it decreases as the borrower becomes more informed. |
| Keywords: | Mortgage broker compensation; Borrower Valuation; Borrower Informedness |
| JEL: | G21 |
| Date: | 2014–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0286&r=cta |
| By: | Bergman, Mats A. (Södertörn University, School of Social Sciences Economics); Lundberg, Sofia (Department of Economics, Umeå School of Business and Economics) |
| Abstract: | Departing from a simple normative theory for the choice between lowest price, highest quality (beauty contest) and more complex scoring rules, we empirically investigate the behavior of local and central authorities. We survey a gross sample of 40 contracting entities about perceived key characteristics of products bought in 651 public procurements and collect data on supplier selection methods for these procurements. We compare actual scoring rules with theoretical norms and analyze what product characteristics make deviation from the norm more or less likely. In addition, a control group of 275 authorities was surveyed about similar but hypothetical procurements. We find that more complex scoring rules are used more often when the authority is uncertain about costs and about delivered quality, in accordance with our hypotheses. However, authority effects are also found to directly and indirectly influence the choice of supplier-selection method, suggesting that tendering design is partially driven by local habits or institutional inertia. |
| Keywords: | Auctions; Contracting; Habit behavior; Moral hazard; Scoring rules; Supplier selection |
| JEL: | D44 H57 P16 |
| Date: | 2014–09–25 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:umnees:0895&r=cta |
| By: | Eleonora Fichera; James Banks; Matt Sutton |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:man:sespap:1415&r=cta |
| By: | Avidit Acharya; Edoardo Grillo |
| Abstract: | We model a situation in which two countries are involved in a dispute. The dispute can end in a peaceful settlement, or it can escalate to war. If it is common knowledge that the countries are strategically rational, then the only equilibrium outcome of the model is peace. If, on the other hand, each country believes that there is some chance that its adversary is a crazy type that always behaves aggressively, then even a strategically rational country may have an incentive to pretend to be crazy. This leads to war with positive probability. In addition to being qualitatively different from the existing literature, our model (i) enables a more tractable analysis of two-sided incomplete informa- tion, (ii) has a generically unique equilibrium prediction, and (iii) yields several new comparative statics results. For example, we analyze the effect of increas- ing the prior probability that the countries are crazy types, as well as the effect of changing the relative military strengths of the countries, on equilib- rium behavior. In studying these comparative statics, our model identifies two countervailing forces that arise when the prior probability that a country is crazy decreases: a reputation motive that promotes less aggressive behavior by that country, and a defense motive that promotes more aggressive behavior by the other country. |
| Keywords: | war, conflict, bargaining, reputation |
| JEL: | C7 F5 N4 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:cca:wpaper:356&r=cta |
| By: | Cyril Monnet; Thomas Nellen |
| Abstract: | In this working paper, we study the three generic clearing arrangements in the presence of two-sided limited commitment: simple bilateral clearing, segregated collateral clearing through a third party, and - most sophisticated of all - central counterparty (CCP) clearing. Clearing secures the settlement of obligations from over-the-counter (OTC) forward contracts that smooth the income of risk-averse agents. Clearing requires collateral to guarantee settlement; this is costly, as it reduces income from investment. While welfare is greater under more sophisticated clearing arrangements, we find that these are also more demanding in terms of collateral. |
| Keywords: | clearing, central counterparty, segregation, novation, mutualization |
| JEL: | G13 G14 G18 G2 G28 D53 D82 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:snb:snbwpa:2014-04&r=cta |