|
on Contract Theory and Applications |
| By: | Bannier, Christina E.; Feess, Eberhard; Packham, Natalie |
| Abstract: | This paper examines the effect of imperfect labor market competition on the efficiency of compensation schemes in a setting with moral hazard, private information and risk-averse agents. Two vertically differentiated firms compete for agents by offering contracts with fixed and variable payments. Vertical differentiation between firms leads to endogenous, type-dependent exit options for agents. In contrast to screening models with perfect competition, we find that existence of equilibria does not depend on whether the least-cost separating allocation is interim efficient. Rather, vertical differentiation allows the inferior firm to offer (cross-)subsidizing fixed payments even above the interim efficient level. We further show that the efficiency of variable pay depends on the degree of competition for agents: For small degrees of competition, low-ability agents are under-incentivized and exert too little effort. For large degrees of competition, high-ability agents are over-incentivized and bear too much risk. For intermediate degrees of competition, however, contracts are second-best despite private information. |
| Keywords: | Incentive compensation,screening,imperfect labor market competition,vertical differentiation,cross-subsidy |
| JEL: | D82 D86 J31 J33 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfswop:475&r=cta |
| By: | Ezra Einy (BGU); Ori Haimanko (BGU); Ram Orzach (Oakland University, USA); Aner Sela (BGU) |
| Abstract: | We study two-player common-value all-pay auctions (contests) with asymmetric information under the assumption that one of the players has an information advantage over his opponent and both players are budget-constrained. We generalize the results for all-pay auctions with complete information, and show that in all-pay auctions with asymmetric information, sufficiently high (but still binding) bid caps do not change the players' expected total effort compared to the benchmark auction without any bid cap. Furthermore, we show that there are bid caps that increase the players' expected total effort compared to the benchmark. Finally, we demonstrate that there are bid caps which may have an unanticipated effect on the players' expected payoffs - one player's information advantage may turn into a disadvantage as far as his equilibrium payoff is concerned. |
| Keywords: | Common-value all-pay auctions, asymmetric information, information advantage, bid caps. |
| JEL: | C72 D44 D82 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:bgu:wpaper:1402&r=cta |
| By: | Frank A. Sloan; Patricia A. Robinson; Lindsey M. Eldred |
| Abstract: | This study quantifies the importance of private information, separates the extent to which the positive correlation between the accident probability and insurance coverage reflects adverse selection and moral hazard, and analyzes market segmentation on objective accident risk. We use data we collected to examine the importance of potential sources of private information in individualsʼ third- and first-party insurance choices. Individuals with higher subjective accident probabilities have less liability exposure post insurance purchase and more often experience an accident, conditional on factors insurers use for risk classification. This evidence is consistent with the positive correlation between accident occurrence and liability insurance coverage. We find that the positive correlation almost completely reflects adverse selection. In analysis of insurer sorting, we find that accident-free drivers obtain coverage from insurers with higher independent agency quality ratings. High-quality insurers eschew low-quality drivers on measured dimensions because these drivers are more likely to possess private information about their driving ability and proclivities that affect expected loss. Drivers with a higher risk on factors observable to insurers tend to have private information about their accident risk. This sorting process reflects an institutional response to asymmetric information, and assures a continuous supply of private insurance to unsafe drivers. |
| JEL: | D82 I12 R41 |
| Date: | 2014–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20679&r=cta |
| By: | Pierre Chaigneau; Alex Edmans; Daniel Gottlieb |
| Abstract: | This paper shows that the informativeness principle does not automatically extend to settings with limited liability. Even if a signal is informative about effort, it may have no value for contracting. An agent with limited liability is paid zero for certain output realizations. Thus, even if these output realizations are accompanied by an unfavorable signal, the payment cannot fall further and so the principal cannot make use of the signal. Similarly, a principal with limited liability may be unable to increase payments after a favorable signal. We derive necessary and sufficient conditions for signals to have positive value. Under bilateral limited liability and a monotone likelihood ratio, the value of information is non-monotonic in output, and the principal is willing to pay more for information at intermediate output levels. |
| JEL: | D86 J33 |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20456&r=cta |
| By: | Felipe Balmaceda (Facultad de Economía y Empresa, Universidad Diego Portales); Santiago Balseiro (The Fuqua School of Business, Duke University); Jose Correa (Departamento de Ingenieria Industrial, Universidad de Chile); Nicolas Stier-Moses (Columbia School of Business, Columbia University) |
| Abstract: | This article studies a principal-agent problem with discrete outcome and effort level spaces. The principal and the agent are risk neutral and the latter is subject to limited liability. We consider the ratio between the first-best social welfare to the social welfare arising from the principal’s optimal pay-for-performance contract, i.e., the welfare loss. In the presence of moral hazard, we provide simple parametric bounds on the welfare loss of a given instance, and then study the worst-case welfare loss among all instances with a fixed number of effort and outcome levels. Key parameters to these bounds are the number of possible effort levels, the likelihood ratio evaluated at the highest outcome, and the ratio between costs of the highest and the lowest effort levels. As extensions, we also look at linear contracts and at cases with multiple identical tasks. Our work constitutes an initial effort to analyze losses arising from moral hazard problems when the agent is subject to limited liability, and shows that these losses can be costly in the worst case. |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:ptl:wpaper:55&r=cta |
| By: | Mimra, Wanda; Wambach, Achim |
| Abstract: | Riley (1979)'s reactive equilibrium concept addresses problems of equilibrium existence in competitive markets with adverse selection. The game-theoretic interpretation of the reactive equilibrium concept in Engers and Fernandez (1987) yields the Rothschild-Stiglitz (1976)/Riley (1979) allocation as an equilibrium allocation, however multiplicity of equilibrium emerges. In this note we imbed the reactive equilibrium's logic in a dynamic market context with active consumers. We show that the Riley/Rothschild-Stiglitz contracts constitute the unique equilibrium allocation in any pure strategy subgame perfect Nash equilibrium. |
| Keywords: | asymmetric information,competitive insurance market,contract addition,reactive equilibrium |
| JEL: | C72 D82 G22 L10 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfswop:483&r=cta |
| By: | Yi-Fang Liu (College of Management and Economics - Tianjin University, China Center for Social Computing and Analytics - Tianjin University, CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne); Wei Zhang (College of Management and Economics - Tianjin University, China Center for Social Computing and Analytics - Tianjin University); Chao Xu (College of Management and Economics - Tianjin University, China Center for Social Computing and Analytics - Tianjin University); Jørgen Vitting Andersen (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne); Hai-Chuan Xu (College of Management and Economics - Tianjin University, China Center for Social Computing and Analytics - Tianjin University) |
| Abstract: | This paper studies the switching of trading strategies and its effect on the market volatility in a continuous double auction market. We describe the behavior when some uninformed agents, who we call switchers, decide whether or not to pay for information before they trade. By paying for the information they behave as informed traders. First, we verify that our model is able to reproduce some of the stylized facts in real financial markets. Next we consider the relationship between switching and the market volatility under different structures of investors. We find that there exists a positive relationship between the market volatility and the percentage of switchers. We therefore conclude that the switchers are a destabilizing factor in the market. However, for a given fixed percentage of switchers, the proportion of switchers that decide to buy information at a given moment of time is negatively related to the current market volatility. In other words, if more agents pay for information to know the fundamental value at some time, the market volatility will be lower. This is because the market price is closer to the fundamental value due to information diffusion between switchers. |
| Keywords: | Agent-based model; heterogeneity; switching behavior; market volatility |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-00983051&r=cta |
| By: | Manuel Förster (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, CORE - Center of Operation Research and Econometrics [Louvain] - Université Catholique de Louvain (UCL) - Belgique); Ana Mauleon (CORE - Center of Operation Research and Econometrics [Louvain] - Université Catholique de Louvain (UCL) - Belgique, CEREC - Université Saint-Louis - Bruxelles); Vincent Vannetelbosch (CORE - Center of Operation Research and Econometrics [Louvain] - Université Catholique de Louvain (UCL) - Belgique, CEREC - Université Saint-Louis - Bruxelles) |
| Abstract: | We investigate the role of manipulation in a model of opinion formation where agents have opinions about some common question of interest. Agents repeatedly communicate with their neighbors in the social network, can exert some effort to manipulate the trust of others, and update their opinions taking weighted averages of neighbors' opinions. The incentives to manipulate are given by the agents' preferences. We show that manipulation can modify the trust structure and lead to a connected society, and thus, make the society reaching a consensus. Manipulation fosters opinion leadership, but the manipulated agent may even gain influence on the long-run opinions. In sufficiently homophilic societies, manipulation accelerates (slows down) convergence if it decreases (increases) homophily. Finally, we investigate the tension between information aggregation and spread of misinformation. We find that if the ability of the manipulating agent is weak and the agents underselling (overselling) their information gain (lose) overall influence, then manipulation reduces misinformation and agents converge jointly to more accurate opinions about some underlying true state. |
| Keywords: | Social networks; trust; manipulation; opinion leadership; consensus; wisdom of crowds |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-00881145&r=cta |
| By: | Martin Gregor (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nábreží 6, 111 01 Prague 1, Czech Republic) |
| Abstract: | We study a game in which a sender with verifiable private information has to pay an access fee that is announced by a receiver to be able to convey her message to the receiver. The setting is motivated by the literature of pay-and-lobby politics, which finds that politicians decide to schedule informative meetings with lobbyists on the basis of their campaign contributions. We solve the game for all timings, prior beliefs, and noise and valuation parameters. We identify the receiver's tradeoff between the amount of information and the amount of revenue. At the tradeoff, the receiver decides to not receive an informative signal from the sender. Whether `burying one's head in the sand' increases or decreases welfare depends on the degree of the receiver's benevolence. |
| Keywords: | disclosure, persuasion, hard evidence, access fee, lobbying |
| JEL: | C72 C78 D72 D83 |
| Date: | 2014–05 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2014_17&r=cta |
| By: | Bradley Larsen |
| Abstract: | This study quantifies the efficiency of a real-world bargaining game with two-sided incomplete information. Myerson and Satterthwaite (1983) and Williams (1987) derived the theoretical efficient frontier for bilateral trade under two-sided uncertainty, but little is known about how well real-world bargaining performs relative to the frontier. The setting is wholesale used-auto auctions, an $80 billion industry where buyers and sellers participate in alternating-offer bargaining when the auction price fails to reach a secret reserve price. Using 270,000 auction/bargaining sequences, this study nonparametrically estimates bounds on the distributions of buyer and seller valuations and then estimates where bargaining outcomes lie relative to the efficient frontier. Findings indicate that the dynamic mechanism attains 80-91% of the surplus which can be achieved on the efficient frontier. |
| JEL: | C78 D44 D82 L1 |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20431&r=cta |
| By: | Benjamin Hébert |
| Abstract: | Abstract. Why are debt securities so common? I show that debt securities minimize the welfare losses from the moral hazards of excessive risk-taking and lax effort. For any security design, the variance of the security payoff is a statistic that summarizes these welfare losses. Debt securities have the least variance, among all limited liability securities with the same expected value. The optimality of debt is exact in my benchmark model, and holds approximately in a wide range of models. I study both static and dynamic security design problems, and show that these two types of problems are equivalent. The models I develop are motivated by moral hazard in mortgage lending, where securitization may have induced lax screening of potential borrowers and lending to excessively risky borrowers. My results also apply to corporate finance and other principal-agent problems. |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:qsh:wpaper:145746&r=cta |
| By: | Alex Barrachina (University Carlos III, Madrid, Spain); Yair Tauman (IDC Herzliya, Israel, and Stony Brook University, USA); Amparo Urbano Salvador (ERI-CES, University of Valencia) |
| Abstract: | We analyze the effect of industrial espionage on limit-pricing models. We consider an incumbent monopolist engaged in R&D trying to reduce his cost of production and deter a potential entrant from entering the market. The R&D project may be successful or not and its outcome is a private information of the incumbent. The entrant has an access to an Intelligence System (IS hereafter) of a certain precision that generates a noisy signal on the outcome of the R&D project, and she decides whether to enter the market based on two signals: the price charged by the incumbent and the signal sent by the IS. It is assumed that the precision of the IS is exogenous and common knowledge. Our fundamental result is that for intermediate values of the IS precision, the set of pooling equilibria is non-empty even with profitable entry and the entrant enters if the IS tells her the R&D project was not successful. Since in the classical limit-pricing models the entrant never enters in a pooling equilibrium, the use of the IS by the entrant increases competition in pooling equilibrium with high probability. Moreover, the incumbent can deter profitable entry with positive probability. |
| Keywords: | Espionage, Entry deterrence, Asymmetric information, Pooling equilibria. |
| JEL: | C72 D82 L10 L12 |
| Date: | 2014–11 |
| URL: | http://d.repec.org/n?u=RePEc:dbe:wpaper:0714&r=cta |
| By: | Laurent Bouton; Aniol Llorente-Saguer; Frédéric Malherbe |
| Abstract: | A group of agents wants to reform the status quo if and only if this is Pareto improving. Agents have private information and may have common or private objectives, which creates a tension between information aggregation and minority protection. We analyze a simple voting system - majority rule with veto power (Veto) - that essentially resolves this tension, for it combines the advantageous properties of both majority and unanimity rules. We argue that our results shed new light on the evolution of voting rules in the EU institutions and could help to inform debates about policy reforms in cases such as juries in the US. |
| JEL: | D70 |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20417&r=cta |
| By: | Alfarano, Simone; Camacho, Eva; Petrovic, Marko; Provenzano, Giulia |
| Abstract: | In this paper we will give an overview of the more relevant results on the theoretical and experimental research related to public and private information dissemination and aggregation in asset markets, focusing mainly on the contemporaneous presence of public and private information and its effect on market performance. We conclude that the theoretical literature is more developed than the experimental one when dealing with public information and its role in different economic environments. Therefore, a promising research avenue opens for experimentally testing the different, and often contradictory, theoretical results. |
| Keywords: | experiments,financial markets,private and public information,central bank information |
| JEL: | C92 D82 G14 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:fmpwps:9&r=cta |
| By: | Colla De-Robertis, Esteban |
| Abstract: | In this paper I consider the issue of optimal information aggregation for timing decision making. In each period, a decision maker may choose an action which delivers an uncertain payoff, or wait until the next period, in when new information will arrive. The information is provided by a committee of experts. Each member in each period receives a signal correlated to the state. I obtain an optimal rule for aggregating information for each period. |
| Keywords: | Information aggregation. Timing decision making. Experts. |
| JEL: | D7 D81 |
| Date: | 2014–11–09 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:59836&r=cta |
| By: | Andrea M. Buffa; Dimitri Vayanos; Paul Woolley |
| Abstract: | We study the joint determination of fund managers' contracts and equilibrium asset prices. Because of agency frictions, investors make managers' fees more sensitive to performance and benchmark performance against a market index. This makes managers unwilling to deviate from the index and exacerbates price distortions. Because trading against overvaluation exposes managers to greater risk of deviating from the index than trading against undervaluation, agency frictions bias the aggregate market upwards. They can also generate a negative relationship between risk and return because they raise the volatility of overvalued assets. Socially optimal contracts provide steeper performance incentives and cause larger pricing distortions than privately optimal contracts. |
| JEL: | D86 G12 G14 G18 G23 |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20480&r=cta |
| By: | Antonio Estache; Grégoire Garsous; Ronaldo Seroa da Motta |
| Abstract: | This paper investigates the effects of political (mis)alignment on public service deliverywhen mandates are shared between state and local governments. We analyze sewage treatmentpolicies in the State of São Paulo, Brazil. Based on a regression discontinuity design, we establisha causal relationship between political alignment and higher sewage treatment provision.Conceptually, we find that, with uncertain local commitment and weakly enforceable localobligations, shared mandates lead to a moral hazard issue implying service under-provision.When political alignment is an option, our results show that it attenuates such moral hazardeffects. |
| Keywords: | political alignment; infrastructure provision; moral hazard; regression discontinuity design |
| JEL: | H40 H54 H70 P48 |
| Date: | 2014–11 |
| URL: | http://d.repec.org/n?u=RePEc:eca:wpaper:2013/177104&r=cta |
| By: | Venky Venkateswaran (NYU Stern School of Business); Hugo A. Hopenhayn (UCLA); Joel David (USC) |
| Abstract: | We propose a theory linking imperfect information to resource misallocation and hence to aggregate productivity and output. In our setup, firms learn from both private sources and imperfectly informative stock market prices. We devise a novel calibration strategy that uses a combination of firm-level production and stock market data to pin down the information structure in the economy. Applying this methodology to data from the US, China, and India reveals substantial losses in productivity and output due to informational frictions - even when only one factor, namely capital, is subject to the friction. Our estimates for these losses range from 5-19% for productivity and 8-28% for output in China and India, and are smaller, though still significant, in the US. Losses are substantially higher when labor decisions are also made under imperfect information. Private learning plays a significant role in mitigating uncertainty and improving aggregate outcomes; learning from financial markets contributes little, even in the US. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:526&r=cta |
| By: | Ma, Xingliang; Spielman, David J.; Nazli, Hina; Zambrano, Patricia; Zaidi, Fatima; Kouser, Shahzad |
| Abstract: | Efficient information exchanges between sellers and buyers are essential if prices are to act as a signal for resource allocation in an economy. In the case of seed and planting materials, information on quality traits are often difficult for consumers (farmers) to obtain prior to purchase, resulting in failures in the market for seed-based technologies. While regulations on seed certification, labeling and packaging seek to remedy this problem, such regulations are often difficult to enforce where markets are large and diverse, or where the government’s regulatory infrastructure is limited. The market for genetically modified insect-resistant Bt (bacillus thuringiensis) cotton seed in Pakistan appears to be one of these markets. In this paper, we test for the presence of asymmetric information in the seed market by comparing the quality of seed purchased across a representative sample of cotton farmers in Pakistan’s two main cotton-growing provinces. We also test for the extent to which seed prices reflect the efficacy of the insect-resistance traits—a quality trait that is generally unobservable by the farmer—as measured by ELISA (enzyme-linked immunosorbent assay) readings of the Bt toxin expression levels. Drawing on initial results from these tests, we then explore the various regulatory mechanisms and market instruments that can be used to help farmers to better infer Bt seed quality. |
| Keywords: | Bt cotton, asymmetric information, Pakistan, Agribusiness, Community/Rural/Urban Development, Consumer/Household Economics, Demand and Price Analysis, Food Security and Poverty, International Development, Marketing, Research and Development/Tech Change/Emerging Technologies, |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea14:175278&r=cta |