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on Contract Theory and Applications |
| By: | Pierre Chaigneau; Alex Edmans; Daniel Gottlieb |
| Abstract: | The informativeness principle demonstrates qualitative benefits to increasing signal precision. However, it is difficult to quantify these benefits -- and compare them against the costs of precision -- since we typically cannot solve for the optimal contract and analyze how it changes with informativeness. We consider a standard agency model with risk-neutrality and limited liability, where the optimal contract is a call option. The direct effect of reducing signal volatility is a fall in the value of the option, benefiting the principal. The indirect effect is a change in the agent's effort incentives. If the original option is sufficiently out-of-the-money, the agent can only beat the strike price if he exerts effort and there is a high noise realization. Thus, a fall in volatility reduces effort incentives. As the agency problem weakens, the gains from precision fall towards zero, potentially justifying pay-for-luck. |
| JEL: | D86 J33 |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20542&r=cta |
| By: | Manzoni, Elena; Penczynski, Stefan |
| Abstract: | This paper models a purely informational mechanism behind the incumbency advantage. In a two-period electoral campaign with two policy issues, a specialized incumbent and an unspecialized, but possibly more competent challenger compete for election by voters who are heterogeneously informed about the state of the world. Due to the asymmetries in government responsibility between candidates, the incumbent's statement may convey information on the relevance of the issues to voters. In equilibrium, the incumbent sometimes strategically releases his statement early and thus signals the importance of his signature issue to the voters. We find that, since the incumbent's positioning on the issue reveals private information which the challenger can use in later statements, the incumbent's incentives to distort the campaign are decreasing in his quality, as previously documented by the empirical literature. The distortions arising in equilibrium are decreasing in the incumbent's effective ability; however, the distortions may be increasing in the incumbent's reputation of expertise on his signature issue. |
| Keywords: | Incumbency advantage , electoral competition , information revelation , agenda setting |
| JEL: | D72 D82 D60 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:mnh:wpaper:37189&r=cta |
| By: | Lionel De Boisdeffre (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, CATT - Centre d'Analyse Théorique et de Traitement des données économiques) |
| Abstract: | We consider a pure exchange financial economy, where rational agents, possibly asymmetrically informed, forecast prices privately and, therefore, face "exogenous uncertainty", on the future state of nature, and "endogenous uncertainty" on future prices. At a sequential equilibrium, all agents expect the "true" price as a possible outcome and elect optimal strategies at the first period, which clear on all markets ex post. We introduce no-arbitrage prices and display their revealing properties. Under mild conditions, we show that a sequential equilibrium exists, whatever the financial structure and agents' private information or beliefs. This result suggests that existence problems of standard sequential equilibrium models, following Hart (1975) or Radner (1979), stem from the rational expectation and perfect foresight assumptions, which are both dropped in our model. |
| Keywords: | Sequential equilibrium; temporary equilibrium; perfect foresight; existence; rational expectations; financial markets; information; inferences; asymmetric information; arbitrage |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-01053471&r=cta |
| By: | Di Maggio, Marco; Pagano, Marco |
| Abstract: | We study a model where some investors ("hedgers") are bad at information processing, while others ("speculators") have superior information-processing ability and trade purely to exploit it. The disclosure of financial information induces a trade externality: if speculators refrain from trading, hedgers do the same, depressing the asset price. Market transparency reinforces this mechanism, by making speculators' trades more visible to hedgers. As a consequence, issuers will oppose both the disclosure of fundamentals and trading transparency. Issuers may either under- or over-provide information compared to the socially efficient level if speculators have more bargaining power than hedgers, while they never under-provide it otherwise. When hedgers have low financial literacy, forbidding their access to the market may be socially efficient. |
| Keywords: | disclosure,transparency,financial literacy,limited attention,OTC markets |
| JEL: | D83 D84 G18 G38 K22 M48 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfswop:485&r=cta |
| By: | Jess Benhabib; Feng Dong; Pengfei Wang |
| Abstract: | We develop a macroeconomic model with adverse selection. A continuum of households purchase goods from a continuum of anonymous producers. The quality of products can only be learned after trade. Adverse selection arises as low-quality goods deliver higher profits for producers but are less desirable for households. Higher aggregate demand induces more high-quality goods, raises average quality, and drives up household demand. We show that this demand externality can generate multiple equilibria or indeterminacy even when the steady state equilibrium is unique, making self-fulfilling expectation driven business cycles possible. Indeterminacy arising from adverse selection in credit markets is also constructed. |
| JEL: | E32 E44 G01 |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20642&r=cta |
| By: | Galanis, Spyros (University of Southampton); Vlassopoulos, Michael (University of Southampton) |
| Abstract: | We report results from a sender-receiver deception game, which tests whether an individual's decision to deceive is influenced by a concern for relative standing in a reference group. The sender ranks six possible outcomes, each specifying a payoff for him and the receiver. A message is then transmitted to the receiver, announcing that the sender has ranked the outcomes according to the receiver's payoff, from highest to lowest. The receiver, without knowing that there is conflict of interest, chooses an action that determines the payoff of both players. The sender has an incentive to deceive the receiver, in order to obtain a higher payoff. A sender is positively biased if he thinks that he is higher in the deception distribution than in reality. We show theoretically that a positively biased sender will increase cheating when presented with information about the deception of his peers. The experimental data confirm this. We conclude that concern for relative standing does play a role in the decision to deceive. |
| Keywords: | deception, lying, sender-receiver game, concern for rank |
| JEL: | C91 D03 D83 |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp8442&r=cta |
| By: | Ralph-C. Bayer (School of Economics, University of Adelaide) |
| Abstract: | This paper develops a quantal-response adaptive learning model which combines sellers’ bounded rationality with adaptive belief learning in order to explain price dispersion and dynamics in laboratory Bertrand markets with perfect information. In the model, sellers hold beliefs about their opponents’ strategies and play quantal best responses to these beliefs. After each period, sellers update their beliefs based on the information learned from previous play. Maximum likelihood estimation suggests that when sellers have full past price information, the learning model explains price dispersion within periods and the dynamics across periods. The fit is particularly good if one allows for sellers being risk averse. In contrast, Quantal Response Equilibrium does not organize the data well. |
| Keywords: | Price dispersion, Adaptive Learning, Bounded rationality, Quantal Response Equilibrium. |
| JEL: | C73 C91 D83 L13 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:adl:wpaper:2013-16&r=cta |
| By: | Nicolas Jacquemet (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, BETA - Bureau d'économie théorique et appliquée - CNRS : UMR7522 - Université de Strasbourg - Université Nancy II); Adam Zylbersztejn (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne) |
| Abstract: | We experimentally study an asymmetric coordination game with two Nash equilibria: one is Pareto-efficient, the other is Pareto-inefficient and involves a weakly dominated strategy. We assess whether information about the interaction partner helps eliminate the imperfect equilibrium. Our treatments involve three information-enhancing mechanisms: repetition and two kinds of individual signals: messages from partner or observation of his past choices. Repetition-based learning increases the frequencies of the most efficient outcome and the most costly strategic mismatch. Moreover, it is superseded by individual signals. Like previous empirical studies, we find that signals provide a screening of partners' intentions that reduces the frequency of coordination failures. Unlike these studies, we find that the transmission of information between partners, either via messages or observation, does not suffice to significantly increase the overall efficiency of outcomes. This happens mostly because information does not restrain the choice of the dominated action by senders. |
| Keywords: | coordination game; communication; cheap-talk; observation |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-00845123&r=cta |
| By: | Hafalir, Isa E.; Hakimov, Rustamdjan; Kübler, Dorothea; Kurino, Morimitsu |
| Abstract: | We theoretically and experimentally study a college admissions problem in which colleges accept students by ranking students' efforts in entrance exams. Students hold private information regarding their ability level that affects the cost of their efforts. We assume that student preferences are homogeneous over colleges. By modeling college admissions as contests, we solve and compare the equilibria of "centralized college admissions" (CCA) in which students apply to all colleges, and "decentralized college admissions" (DCA) in which students can only apply to one college. We show that lower ability students prefer DCA whereas higher ability students prefer CCA. The main qualitative predictions of the theory are supported by the experimental data, yet we find a number of behavioral differences between the mechanisms that render DCA less attractive than CCA compared to the equilibrium benchmark. |
| Keywords: | college admissions,incomplete information,student welfare,contests,all-pay auctions,experiment |
| JEL: | C78 D78 I21 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:wzbmbh:spii2014208&r=cta |
| By: | Fulvio Fontini (Department of Economics and Management - Università degli Studi di Padova - University of Padua); Katrin Millock (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Michele Moretto (Department of Economics and Management - Università degli Studi di Padova - University of Padua) |
| Abstract: | In many cases consumers cannot observe firms' investment in quality or safety, but have only beliefs on the average quality of the industry. In addition, the outcome of the collective investment game of the firms may be stochastic since firms cannot control perfectly the technology or external factors that may affect production. In such situations, when only consumers' subjective perceptions of the industry level of quality matters, the regulator may make information available to firms or subsidize their information acquisition. Under what conditions is it desirable to make information available? We show how firms' overall level of investment in quality depends upon the parameters of the quality accumulation process, the cost of investment and the number of firms in the industry. We also show the potentially negative effects on the total level of quality from providing information on consumers' actual valuation. |
| Keywords: | Collective reputation; option value; quality |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-00825782&r=cta |
| By: | Saak, Alexander |
| Abstract: | Selected Poster for AAEA 2014 annual meetings |
| Keywords: | monitoring, food safety, reputation, supply chain, moral hazard, Agricultural and Food Policy, Industrial Organization, |
| Date: | 2014–07–27 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea14:169783&r=cta |
| By: | Huck, Steffen; Lünser, Gabriele; Spitzer, Florian; Tyran, Jean-Robert |
| Abstract: | In a laboratory experiment designed to capture key aspects of the interaction be-tween physicians and patients in a stylized way, we study the effects of medical insurance and competition in the guise of free choice of physician. Medical treat-ment is an example of a credence good: only the physician (but not the patient) knows the appropriate treatment, and even after consulting, the patient is not sure whether he got proper treatment or got an unnecessary treatment, i.e. was overtreated. We find that with insurance, moral hazard looms on both sides of the market: patients consult more often and physicians overtreat more often than in the baseline condition. Competition decreases overtreatment compared to the baseline and patients therefore consult more often. When the two institutions are combined, competition is found to partially offset the adverse effects of insur-ance: most patients seek treatment, but overtreatment is moderated. |
| Keywords: | Credence good,Patient,Physician,Overtreatment,Competition,Insurance,Moral hazard |
| JEL: | C91 I11 I13 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:wzbeoc:spii2014307&r=cta |
| By: | Clemente, Felippe; da Silva Júnior, Aziz Galvão |
| Abstract: | A contract is considered incomplete when the optimal solution for a contractual problem requires some information from the parts which is not observable by one or both parts. This problem is found in the biodiesel production chain among small scale farmers and biodiesel companies in Brazil, which is regulated by a certification called Social Fuel Seal under the framework of the PNPB (Brazilian Program for Production and Use of Biodiesel). In order to minimize this hindrance, an incentive structure was elaborated utilizing the nonlinear programming. The Principal-Agent approach was used to verify if these new incentives allow for the small scale soybean farmer to put great effort level in the agricultural production. When the incentive structure is evaluated through the model proposed, the result indicates that both the farmer and the biodiesel company will have their profits maximized if the producer puts on great effort. Thus, it is clear the importance to include this mechanism of stimulation to productivity increase into the PNPB framework in order to contribute to the competitiveness of the Biodiesel chain in Brazil. |
| Keywords: | Contracts Farms, Biofuel, Principal-Agent Model, Agribusiness, Food Consumption/Nutrition/Food Safety, Industrial Organization, Research and Development/Tech Change/Emerging Technologies, Research Methods/ Statistical Methods, |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:ags:iefi13:164767&r=cta |
| By: | Kala Krishna; Lena Sheveleva |
| Abstract: | Why do developing countries fail to specialize in products that they (at least potentially) have a comparative advantage in? For example, farmers in land-poor developing countries overwhelmingly produce staples rather than exotic fruits that command high prices. We propose a simple model of trade and intermediation that shows how holdup resulting from poor contracting environments can produce such an outcome. We use the model to examine which polices can help ameliorate the problem, even when its cause cannot be eliminated. In the model, farmers can produce two types of goods. Wheat is suitable for subsistence but farmers are inefficient in producing it. Farmers are efficient in making strawberries, but cannot subsist on it, and have to sell them to an intermediary who makes profits by selling it at the world price. In a frictionless world farmers would specialize in strawberries. Central to the model is the inability of farmers and traders to contract ex-ante on a price. The absence of enforceable contracts sets the stage for the classic hold up problem and precludes negotiating the terms of trade prior to entry into production. We use a two period model with continuum of traders and farmers. In the first period, farmers decide whether to produce wheat or strawberries and intermediaries decide whether to enter the business of intermediation. In the second period, farmers and traders meet randomly and trade. Since meetings are random and traders do not know the number of local competitors but do know how thick the market is, they can infer the distribution of potential rivals and offer a price based on this information. In other words, traders compete for the output of farmers in the first price auction. As a result, some farmers fetch a high price for their strawberries; others fetch a low price, or even fail to meet an intermediary. Farmers make the production decision based on the expected price. We solve the model and characterize all the possible equilibria as a function of the primitive parameters. Of particular interest is the region in the parameter space that yields multiple equilibria. In the good equilibrium, specialization occurs according to comparative advantage and there is intermediation, while in the bad equilibrium, there is no intermediation and the staple is produced. Our work suggests that there may be some simple measures to ensure intermediation and specialization according to comparative advantage even if the government is not able to resolve the core issue, the underlying lack of enforceable contracts. A temporary production subsidy or a marketing board that ensures a sufficiently high minimum price to the farmer can help an economy remove the bad equilibrium without intermediation. This paper is closely related to the work of Antras and Costinot (2011). In their paper they focus on the implications of intermediation for globalization in a model that assumes that contracts between traders and producers are enforceable. We study the implications of contractual failure on production choices in a model of trade with intermediation. |
| JEL: | O12 |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20630&r=cta |
| By: | Ansgar Walther |
| Abstract: | Banks create excessive systemic risk through leverage and maturity mismatch, as financial constraints introduce welfare-reducing pecuniary externalities. Macroprudential regulators can achieve efficiency with simple linear constraints on banks' balance sheets, which require less information than Pigouvian taxes. These can be implemented using the Liquidity Coverage and Net Stable Funding ratios of Basel III. When bank failures are socially costly, microprudential regulation of leverage is also required. Optimally, macroprudential policy reacts to changes in systematic risk and credit conditions over the business cycle, while microprudential policy reacts to both systematic and idiosyncratic risk. |
| Keywords: | Systemic risk, leverage, maturity mismatch, macroprudential regulation, liquidiity, capital requirements, fire sales |
| JEL: | G18 G21 G28 E44 |
| Date: | 2014–09–25 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:725&r=cta |