nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2015‒01‒31
nine papers chosen by
Guillem Roig
University of Melbourne

  1. Information Disclosure and Consumer Awareness By Li, Sanxi ; Peitz, Martin ; Zhao, Xiaojian
  2. Discrimination in a new model of contests with two-sided asymmetric information By David Perez Castrillo ; David Wettstein
  3. School Choice Mechanisms, Peer Effects and Sorting By Caterina Calsamiglia ; Francisco Martínez-Mora ; Antonio Miralles
  4. Social capital and incentives in the provision of product quality by cooperatives By Deng, Wendong ; Hendrikse, George
  5. Optimal taxation and debt with uninsurable risks to human capital accumulation By Gottardi, Piero ; Kajii, Atsushi ; Nakajima, Tomoyuki
  6. Credit Supply and the Housing Boom By Giorgio Primiceri ; Andrea Tambalotti ; Alejandro Justiniano
  7. Optimal Spatial Taxation By Nezih Guner ; Jan Eeckhout
  8. Aggregate implications of financial and labour market frictions By Ander Perez ; Andrea Caggese
  9. Lack of Selection and Poor Management Practices: Firm Dynamics in Developing Countries By Michael Peters ; Ufuk Akcigit

  1. By: Li, Sanxi ; Peitz, Martin ; Zhao, Xiaojian
    Abstract: Whether consumers are aware of potentially adverse product effects is key to private and social incentives to disclose information about undesirable product characteristics. In a monopoly model with a mix of aware and unaware consumers, a larger share of unaware consumers makes information disclosure less likely to occur. Since the firm is not interested in releasing information to unaware consumers, a more precise targeting technology that allows the firm to better keep unaware consumers in the dark leads to more disclosure. A regulator may want to intervene in this market and impose mandatory disclosure rules.
    Keywords: Information disclosure , informative advertising , targeted advertising , consumer awareness , behavioral bias , non-common prior , consumer protection , behavioral industrial organization
    JEL: L51 M38
    Date: 2014
  2. By: David Perez Castrillo (Dept. of Economics & CODE, Universitat Aut?noma de Barcelona and Barcelona GSE, 08193 Bellaterra (Barcelona), Spain ); David Wettstein (BGU )
    Date: 2014
  3. By: Caterina Calsamiglia ; Francisco Martínez-Mora ; Antonio Miralles
    Abstract: We study the effects that school choice mechanisms and school priorities have on the degree of sorting of students across schools and neighborhoods, when school quality is endogenously determined by the peer group. Using a model with income or ability heterogeneity, we compare the popular Deferred Acceptance (DA) and Boston (BM) mechanisms under several scenarios. With residential priori-ties, students and their households fully segregate into quality-ranked schools and neighborhoods under both mechanisms. With no residential priorities and a bad public school, DA does not generate sorting in general, while BM does so between a priori good public schools. With private schools, the best public school becomes more elitist under BM.
    Keywords: school choice, mechanism design, peer effects, local public goods.
    JEL: I21 H4 D78
    Date: 2015–01
  4. By: Deng, Wendong ; Hendrikse, George
    Abstract: This article highlights the interaction between social capital, pooling and quality premiums and their influence on cooperative members’ decisions regarding their product quality. A necessary condition for cooperative equitable principles such as complete pooling is that there exists a high level of social capital in the cooperative. When the level of social capital is high, the social motivation in the cooperative can guarantee high product quality while economic incentives are weak. When the level of social capital declines, an income rights structure with stronger quality incentives must be adopted by the cooperative to maintain the product quality. The cooperative is uniquely efficient when the farmers are risk averse and product quality is uncertain. When the level of social capital in cooperatives is higher than a threshold, which is decreasing in members’ subjective risk toward production uncertainty, cooperatives are able to achieve higher product quality than investor owned firms (IOFs).
    Keywords: Quality, Social Capital, Cooperatives, Income Rights Structure, Industrial Organization,
    Date: 2014–08
  5. By: Gottardi, Piero (European University Institute ); Kajii, Atsushi (Kyoto University ); Nakajima, Tomoyuki (Federal Reserve Bank of Atlanta )
    Abstract: We consider an economy where individuals face uninsurable risks to their human capital accumulation and study the problem of determining the optimal level of linear taxes on capital and labor income together with the optimal path of the debt level. We show both analytically and numerically that in the presence of such risks it is beneficial to tax both labor and capital income and to have positive government debt.
    JEL: D52 D60 D90 E20 E62 H21 O40
    Date: 2014–11–01
  6. By: Giorgio Primiceri (Northwestern University ); Andrea Tambalotti (Federal Reserve Bank of New York ); Alejandro Justiniano (Federal Reerve Chicago )
    Abstract: We present a model of housing with collateral constraints on both on borrowers and lenders. The constraint on the borrowers corresponds to the usual collateral requirement on the purchase of new houses that has been extensively studied in the literature. The contribution of our analysis is to study constraints on the supply of credit, modeled as limitations in the share of mortgages that lenders can hold in their portfolios. These limits are motivated by risk weighted capital requirements on commercial banks, as well as minimum asset quality restrictions on large institutional investors. The analysis begins with a simple stylized model to understand the implications of transitioning to higher levels of credit supply. To quantify the macroeconomic effects of credit supply expansions we embed borrower and lender constraints into a rich dynamic model, calibrated using evidence on the expansion of off-balance sheet vehicles and market-based funding by financial intermediaries, as well as micro (Survey of Consumer Finances) and macro data (Flow of Funds, NIPA). Our results suggest that the housing boom which preceded the Great Recession was due to a progressive loosening of lending constraints in the residential mortgage market. This view is consistent with a number of empirical observations, such as the rapid increase in house prices and household debt, the stability of debt relative to collateral values, and the fall in mortgage rates. These empirical facts are difficult to reconcile with the popular view that attributes the housing boom to a loosening of borrowing constraints associated with lower collateral requirements.
    Date: 2014
  7. By: Nezih Guner (Universitat Autonoma de Barcelona ); Jan Eeckhout (University College London and GSE-UPF )
    Abstract: We analyze the role of optimal income taxation across different locations. Existing federal income tax schedules have a distortionary effect and result in the misallocation of labor across cities of different size. Because of higher productivity in big cities, wages for identically skilled workers are larger than in small cities. Progressive taxation thus implies that citizens in big cities pay higher taxes than in small cities. With mobility, utility is equalized, and the taxes are reflected in equilibrium wages and house prices. We solve for the optimal level of progressiveness. We find that the optimal level is not zero, but that it is less than what is observed in the US economy. Simulating the US economy under the optimal tax schedule, we find large effects on output and population mobility. GDP increases are in the range of 2.6–8.8%, and the fraction of population in 5 largest cities grows between 1.5–4.9%. The welfare effects however are small, 0.008–0.067%. This is due to the fact that the big output gains are lost in increased costs of living.
    Date: 2014
  8. By: Ander Perez (Universitat Pompeu Fabra ); Andrea Caggese (Pompeu Fabra University )
    Abstract: This paper develops a model with both financial and labor market frictions, and jointly analyzes the precautionary behavior of firms and households. Financial frictions generate costly bankruptcy risk for firms and limited insurance against unemployment risk for workers. We solve and simulate a calibrated version of the model and show that the precautionary decisions of households and firms interact with each other to significantly amplify the effect of financial factors on aggregate output and unemployment, even in the absence of price and wage rigidity. This result can be interpreted as a negative demand externality. Firms fire workers to maximize profits, but do not internalize the negative effect of the increase in unemployment on households. Households consume less to increase precautionary saving, but do not internalize the negative impact of their decision on firms' profits and default risk. The importance of this externality is quantitatively large. We calibrate an economy with moderate default risk in firms and a very small risk aversion and precautionary behavior of households, obtaining an equilibrium unemployment level of 6.5%. Increasing risk aversion to more realistic levels increases equilibrium unemployment up to 11.1%. The same increase in risk aversion applied to an economy with more severe firm financing frictions increases unemployment from 7.7% to 21.6%. Finally, we conduct policy experiments and analyze to what extent firing costs and unemployment benefits reduce the impact of this negative externality.
    Date: 2014
  9. By: Michael Peters (London School of Economics ); Ufuk Akcigit (University of Pennsylvania )
    Abstract: As recently shown by Hsieh and Klenow (2012), rm dynamics dier substantially across countries. While firms in the US experience substantial growth during their life-cycle, firms in developing countries, especially in India, barely expand. We present a tractable microfounded endogenous growth model to explain these differences. At the heart of the theory are two sources of heterogeneity across countries. First, we explicitly allow firms to register as formal firms or stay in the informal sector. While informality comes with the benefit of not being subject to taxes and regulation, informal firms are subject to government audits and the risk of being shut down. This lowers the marginal return of technology adoption and informal firms have an incentive to stay small. Second, we incorporate the recent state-of-the-art advances from Bloom and Van Reenen (2010) that managerial practices differ across countries and incorporate managers as a necessary input to run multi-product establishments. Better managers will induce a steeper life-cycle profile as it allows firms to scale up easily and to expand into new product lines. While the model has rich implications for firms' life-cycle, it still has a tractable analytic solution, which we can easily confront with the micro-evidence and calibrate successfully to the data of Hsieh and Klenow (2012).
    Date: 2014

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