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on Contract Theory and Applications |
| By: | Veronica Guerrieri; Robert Shimer |
| Abstract: | This paper explores price formation when sellers are privately informed both about their preferences and the quality of their asset. In equilibrium, sellers recognize that it will be harder to sell their asset at higher prices, while buyers recognize that they will get higher quality assets on average at higher prices. There are many equilibria of this model, including one in which all trade takes place at one price. Under a behavioral restriction, we find a unique semi-separating equilibrium in which trade takes place over an interval of prices. We characterize necessary and sufficient conditions for this equilibrium to be Pareto optimal. Even though the semi-separating equilibrium allows for more trading opportunities, it may be Pareto dominated and may have less trade than the one-price equilibrium. |
| JEL: | D82 G12 |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20623&r=cta |
| By: | Felipe Balmaceda (Facultad de Economía y Empresa, Universidad Diego Portales) |
| Abstract: | This paper studies optimal task assignments in a risk neutral principal-agent model in which agents are compensated according to an aggregated performance measure. The main trade-off involved is one in which specialization allows the implementation of any possible effort profile, while multitasking constraint the set of implementable effort profiles. Yet, the implementation of any effort profile in this set is less expensive than that under specialization. The principal prefers multitasking to specialization except when tasks are complements and the output after success is small enough so that it is not second-best optimal to implement high effort in each task. This result is robust to several extensions such as the existence of multiple performance measures. |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:ptl:wpaper:54&r=cta |
| By: | Westéus, Morgan (Department of Economics, Umeå School of Business and Economics); Raattamaa, Tomas (Department of Economics, Umeå School of Business and Economics) |
| Abstract: | This paper adds to the theoretical literature on the incentives of Temporary Work Agencies (TWAs). Using a principal-agent model with hidden action to analyse two main types of contracts between a TWA and a Client Firm (CF), the TWA is shown to potentially act against the best interest of the CF when helping to fill a vacant position. The results also suggest that the adverse effect of the incentive misalignment is larger when workers are leased rather than hired by the CF. However, this effect could potentially be offset by introducing a sufficient level of competition among TWAs. |
| Keywords: | Temporary work agency; client firm; incentives; matching; contracts |
| JEL: | J41 J44 J64 |
| Date: | 2014–11–12 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:umnees:0896&r=cta |
| By: | Michael R. Roberts |
| Abstract: | Using data from SEC filings, I show that the typical bank loan is renegotiated five times, or every nine months. The pricing, maturity, amount, and covenants are all significantly modified during each renegotiation, whose timing is governed by the financial health of the contracting parties and uncertainty regarding the borrowers' credit quality. The relative importance of these factors depends on the duration of the lending relationship. I interpret these results in light of financial contracting theories and emphasize that renegotiation is an important mechanism for dynamically completing contracts and for allocating control rights ex post. |
| JEL: | D82 G21 G23 G32 K12 |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20484&r=cta |
| By: | Estrada, Fernando |
| Abstract: | The aim of this paper is to interpret the relationships between information networks and the civil wars (Colombia). Over a period of paramilitary violence networks of informants were used with a strategic purpose. In fact, the paramilitaries were preparing each slaughter counting information previously learned between the inhabitants of the town. For these reasons, it is shown that information is a key phenomenon to understand civil wars. Moreover, as demonstrated in this work is the evolution of the slaughter in the civil wars as a result of rumor and information. |
| Keywords: | Civil wars, massacres, paramilitary, information, rumors, Colombia, communication. |
| JEL: | D7 D74 H7 Z0 D89 D82 D8 D85 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:59949&r=cta |
| By: | Ali Yurukoglu (Stanford University); Claire Lim (Cornell University) |
| Abstract: | This paper studies time inconsistency, asymmetric information, and political ideology in natural monopoly regulation of electricity distribution companies. Empirically, more conservative political environments have higher regulated rates of return and worse operational efficiency as measured by electricity lost in distribution. Capital investment improves reliability in a cost effective manner. We estimate a dynamic game theoretic model of utility regulation featuring investment and asymmetric information. Under-investment due to time inconsistency is severe. Conservative regulators improve welfare losses due to time inconsistency, but worsen losses due to asymmetric information. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:530&r=cta |
| By: | Robert Hall |
| Abstract: | This paper reviews the literature on trade with asymmetric information, from the seminal contribution of Akerlof (1970) to the recent paper by Shimer (2013) presented at the XVI Conference of the Central Bank of Chile. |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:739&r=cta |
| By: | Georgy Egorov; Konstantin Sonin |
| Abstract: | In elections that take place in a less-than-perfect democracy, incumbency advantages are different from those in mature democracies. The incumbent can prevent credible challengers from running, organize vote fraud, or even physically eliminate his main opponents. At the same time, formally winning the election does not guarantee staying in power. We present a unified model of elections and mass protests where the purpose of competitive elections is to reveal information about the relative popularity of the incumbent and the opposition. Citizens are heterogenous in their attitudes toward the dictator, and these individual preferences serve as private signals about the aggregate distribution of preferences; this ensures a unique equilibrium for any information the incumbent may reveal. We show that the most competent or popular dictators run in competitive elections, mediocre ones prevent credible opponents from running or cancel elections, and the least competent ones use outright repressions. A strong opposition makes competitive elections more likely but also increases the probability of repression. A totalitarian regime, where repression is cheaper, will have more repression, but even in the absence of repression, competitive elections will be rarer. A crueler, say, military, regime, where protesting is costly, makes repression less likely and, surprisingly, competitive elections more likely. |
| JEL: | D72 D82 H00 |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20519&r=cta |
| By: | Waddell, Glen R. (University of Oregon); Lee, Logan M. (University of Oregon) |
| Abstract: | We model a hiring process in which the candidate is evaluated sequentially by two agents of the firm who each observe an independent signal of the candidate's productivity. We introduce the potential for taste-based discrimination and characterize how one agent's private valuation of the candidate influences the other agent's hiring practices. This influence is often in an offsetting direction and is partially corrective. Yet, this offsetting response can also be large enough that even a high-productivity candidate who is privately favoured by one agent, as may be the case in efforts to increase gender or racial diversity, is less likely to be hired even when the other agent has no preference over private, non-productive attributes. |
| Keywords: | hiring, race, gender, diversity, discrimination |
| JEL: | J1 J7 D8 |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp8445&r=cta |
| By: | Ralph-C Bayer (School of Economics, University of Adelaide) |
| Abstract: | A player's knowledge of her own actions and the corresponding own payoffs may enable her to infer or form belief about what the payoffs would have been if she had played differently. In studies of low-information game settings, however, players' ex-post inferences and beliefs have been largely ignored by quantitative learning models. For games with large strategy spaces, the omission may seriously weaken the predictive power of a learning model. We propose an extended payoff assessment learning model which explicitly incorporates players' ex-post inferences and beliefs about the foregone payoffs for unplayed strategies. We use the model to explain the pricing and learning behavior observed in a Bertrand market experiment. Maximum likelihood estimation shows that the extended model organizes the data remarkably well at both aggregate level and individual level. |
| Keywords: | Learning, Ex-Post Inference, Partial Information, Bertrand Duopoly |
| JEL: | C73 D43 D83 L13 |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:adl:wpaper:2013-22&r=cta |
| By: | Matthias Efing; Harald Hau; Patrick Kampkötter; Johannes Steinbrecher |
| Abstract: | We use payroll data on 1.2 million bank employee years in the Austrian, German, and Swiss banking sector to identify incentive pay in the critical banking segments of treasury/capital market management and investment banking for 66 banks. We document an economically significant correlation of incentive pay with both the level and volatility of bank trading income-particularly for the pre-crisis period 2003--7 for which incentive pay was strongest. This result is robust if we instrument the bonus share in the capital markets divisions with the strength of incentive pay in unrelated bank divisions like retail banking. Moreover, pre-crisis incentive pay appears too strong for an optimal trade-off between trading income and risk which maximizes the NPV of trading income. |
| JEL: | D22 G01 G20 G21 G38 |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20468&r=cta |
| By: | Alex Edmans; Doron Levit; Devin Reilly |
| Abstract: | This paper studies the corporate governance and asset pricing implications of investors owning blocks in multiple firms. Common wisdom is that multi-firm ownership weakens governance because the blockholder is spread too thinly. We show that this need not be the case. In a single-firm benchmark, the blockholder governs through exit, selling her stake if the firm underperforms. With multiple firms, the blockholder may sell even a value-maximizing firm, to disguise her exit from another underperforming firm as being motivated by a portfolio-wide liquidity shock. This reduces the manager's effort incentives and weakens governance. On the other hand, governance can be stronger, because selling one firm and not the other is a powerful signal of underperformance. Common ownership leads to firms' stock prices being correlated, even if their fundamentals are uncorrelated. We derive empirical predictions for the direction of correlation and for whether governance is stronger or weaker with multiple firms. |
| JEL: | G34 |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20420&r=cta |
| By: | Johannes Becker (University of Münster); Ronald B Davies (University College Dublin); Gitte Jakobs (University of Münster) |
| Abstract: | Advance pricing agreements (APAs) determine transfer prices for intra-fi?rm transactions in advance. This paper interprets these contracts as a means to overcome a hold-up problem that occurs because governments cannot commit to non-excessive future tax rates. In addition, with private information, just as in practice, our APAs will be complex and require lengthy negotiations. Never- theless, implemented APAs lead to a Pareto improvement even when all agents are risk neutral. However, not all efficient APAs are concluded in equilibrium. International agreements to avoid double taxation will likely reduce the number of realized APAs. |
| Keywords: | Advance Pricing Agreements, Corporate Taxation, Multinational Firms, Transfer Pricing |
| JEL: | H25 M41 G32 |
| Date: | 2014–11–11 |
| URL: | http://d.repec.org/n?u=RePEc:ucn:wpaper:201419&r=cta |
| By: | Kifmann, Mathias; Siciliani, Luigi |
| Abstract: | This study investigates hospitals' dynamic incentives to select patients when hospitals are remunerated according to a prospective payment system of the DRG type. Given that prices typically reflect past average costs, we use a discrete-time dynamic framework. Patients differ in severity within a DRG. Providers are to some extent altruistic. For low altruism, a downward spiral of prices is possible which induces hospitals to focus on low-severity cases. For high altruism, dynamic price adjustment depends on relation between patients' severity and benefit. In a steady state, DRG prices are unlikely to give optimal incentives to treat patients. |
| Keywords: | hospitals,DRGs,selection,severity |
| JEL: | I11 I18 L13 L44 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:hcherp:201408&r=cta |