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on Contract Theory and Applications |
| By: | Johannes Horner (Cowles Foundation, Yale University); Satoru Takahashi (National University of Singapore); Nicolas Vieille (HEC Paris) |
| Abstract: | This paper characterizes an equilibrium payoff subset for dynamic Bayesian games as discounting vanishes. Monitoring is imperfect, transitions may depend on actions, types may be correlated and values may be interdependent. The focus is on equilibria in which players report truthfully. The characterization generalizes that for repeated games, reducing the analysis to static Bayesian games with transfers. With independent private values, the restriction to truthful equilibria is without loss, except for the punishment level; if players withhold their information during punishment-like phases, a folk theorem obtains. |
| Keywords: | Bayesian games, Repeated games, Folk theorem |
| JEL: | C72 C73 |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:1933r&r=cta |
| By: | Dirk Bergemann (Cowles Foundation, Yale University); Philipp Strack (Microsoft Research New England & UC Berkeley) |
| Abstract: | We characterize the revenue-maximizing mechanism for time separable allocation problems in continuous time. The valuation of each agent is private information and changes over time. At the time of contracting every agent privately observes his initial type which influences the evolution of his valuation process. The leading example is the repeated sales of a good or a service. We derive the optimal dynamic mechanism, analyze its qualitative structure and frequently derive its closed form solution. This enables us to compare the distortion in various settings. In particular, we discuss the cases where the type of each agent follows an arithmetic or geometric Brownian motion or a mean reverting process. We show that depending on the nature of the private information the distortion might increase or decrease over time. |
| Keywords: | Mechanism design, Dynamic auctions, Repeated sales, Impulse response function, Stochastic flow |
| JEL: | D44 D82 D83 |
| Date: | 2014–07 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:1953rr&r=cta |
| By: | Gur Huberman; Rafael Repullo |
| Abstract: | We present a model of the maturity of a bank’s uninsured debt. The bank borrows funds and chooses afterwards the riskiness of its assets. This moral hazard problem leads to an excessive level of risk. Short-term debt may have a disciplining effect on the bank’s risk-shifting incentives, but it may lead to inefficient liquidation. We characterize the conditions under which short-term and long-term debt are feasible, and show circumstances under which only short-term debt is feasible and under which short-term debt dominates long-term debt when both are feasible. Thus, short-term debt may have the salutary effect of mitigating the moral hazard problem and inducing lower risk-taking. The results are consistent with key features of the common narrative of the period preceding the 2007-2009 financial crisis. |
| Keywords: | Short-term debt; long-term debt; optimal financial contracts; risk-shifting; rollover risk; inefficient liquidation. |
| JEL: | F3 G3 |
| Date: | 2014–06–13 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:59294&r=cta |
| By: | Dirk Bergemann (Cowles Foundation, Yale University); Ji Shen (Dept. of Finance, London School of Economics); Yun Xu (Dept. of Electrical Engineering, Yale University); Edmund M. Yeh (Dept. of Computer Science and Electrical Engineering, Northeastern University) |
| Abstract: | We analyze nonlinear pricing with finite information. A seller offers a menu to a continuum of buyers with a continuum of possible valuations. The menu is limited to offering a finite number of choices representing a finite communication capacity between buyer and seller. We identify necessary conditions that the optimal finite menu must satisfy, either for the socially efficient or for the revenue-maximizing mechanism. These conditions require that information be bundled, or "quantized" optimally. We show that the loss resulting from using the n-item menu converges to zero at a rate proportional to 1 = n^2. We extend our model to a multi-product environment where each buyer has preferences over a d dimensional variety of goods. The seller is limited to offering a finite number n of d-dimensional choices. By using repeated scalar quantization, we show that the losses resulting from using the d-dimensional n-class menu converge to zero at a rate proportional to d = n^{2/d}. We introduce vector quantization and establish that the losses due to finite menus are significantly reduced by offering optimally chosen bundles. |
| Keywords: | Mechanism design, Nonlinear pricing, Multi-Dimension, Multi-product, Private information, Limited information, Quantization, Information theory |
| JEL: | C72 C73 D43 D83 |
| Date: | 2015–01 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:1981&r=cta |
| By: | Rubin, Jared; Sheremeta, Roman |
| Abstract: | Using a gift exchange experiment, we show that the ability of reciprocity to overcome incentive problems inherent in principal-agent settings is greatly reduced when the agent’s effort is distorted by random shocks and transmitted imperfectly to the principal. Specifically, we find that gift exchange contracts without shocks encourage effort and wages well above standard predictions. However, the introduction of random shocks reduces wages and effort, regardless of whether the shocks can be observed by the principal. Moreover, the introduction of shocks significantly reduces the probability of fulfilling the contract by the agent, the payoff of the principal, and total welfare. Therefore, our findings demonstrate that random shocks place an important bound on the ability of gift exchange to overcome principal-agent problems. |
| Keywords: | gift exchange, principal-agent model, contract theory, reciprocity, effort, shocks, laboratory experiment |
| JEL: | C72 C91 D63 D81 H50 |
| Date: | 2015–02–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:61904&r=cta |
| By: | Douglas Gale; Piero Gottardi |
| Abstract: | We study a general equilibrium model in which firms choose their capital structure optimally, trading off the tax advantages of debt against the risk of costly default. The costs of default are endogenous: bankrupt firms are forced to liquidate their assets, resulting in a fire sale if there is insufficient liquidity in the market. When the corporate income tax rate is zero, the optimal capital structure is indeterminate, there are no fire sales, and the equilibrium is Pareto efficient. When the tax rate is positive, the optimal capital structure is uniquely determined, default occurs with positive probability, firms’ assets are liquidated at fire-sale prices, and the equilibrium is constrained inefficient. More precisely, firms’ investment is too low and, although the capital structure is chosen optimally, in equilibrium too little debt is used. We also show that introducing more liquidity into the system can be counter-productive: although it reduces the severity of fire sales, it also reduces welfare. |
| Keywords: | debt; equity; capital structure; default; market liquidity; constrained inefficient; incomplete markets |
| JEL: | F3 G3 |
| Date: | 2013–10–30 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:59301&r=cta |
| By: | Guillaume Plantin (Sciences Po Paris and Centre for Economic Policy Research and Hong Kong Institute for Monetary Research) |
| Abstract: | Banks are subject to capital requirements because their privately optimal leverage is higher than the socially optimal one. This is in turn because banks fail to internalize all the costs that their insolvency creates for the non-financial agents using their money-like liabilities to settle transactions. If banks can bypass capital regulation in an opaque shadow-banking system, it may be optimal to relax capital requirements so that liquidity dries up in the shadow-banking system. Tightening capital requirements may spur a surge in shadow-banking activity that leads to an overall larger risk on the money-like liabilities of the formal and shadow banking institutions. |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:322014&r=cta |
| By: | Alberto Martin; Jaume Ventura |
| Abstract: | We live in a new world economy characterized by financial globalization and historically low interest rates. This environment is conducive to countries experiencing credit bubbles that have large macroeconomic effects at home and are quickly propagated abroad. In previous work, we built on the theory of rational bubbles to develop a framework to think about the origins and domestic effects of these credit bubbles. This paper extends that framework to two-country setting and studies the channels through which credit bubbles are transmitted across countries. We find that there are two main channels that work through the interest rate and the terms of trade. The former constitutes a negative spillover, while the latter constitutes a negative spillover in the short run but a positive one in the long run. We study both cooperative and noncooperative policies in this world. The interest-rate and terms-of-trade spillovers produce policy externalities that make the noncooperative outcome suboptimal. |
| Keywords: | financial globalization, international capital flows, exchange rates, interest rates, asset bubbles, capital controls |
| JEL: | E32 E44 O40 |
| Date: | 2015–01 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1465&r=cta |
| By: | Luis Garicano; Esteban Rossi-Hansberg |
| Abstract: | We argue that incorporating the decision of how to organize the acquisition, use, and communication of knowledge into economic models is essential to understand a wide variety of economic phenomena. We survey the literature that has used knowledge-based hierarchies to study issues like the evolution of wage inequality, the growth and productivity of firms, economic development, the gains from international trade, as well as offshoring and the formation of international production teams, among many others. We also review the nascent empirical literature that has, so far, confirmed the importance of organizational decisions and many of its more salient implications. |
| Keywords: | Knowledge; hierarchies; wage inequality; international trade |
| JEL: | J1 N0 R14 J01 |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:60532&r=cta |
| By: | Antoniou, Fabio (Institut für Wirtschaftstheorie I, Humboldt-Univeristät zu Berlin); Kyriakopoulou, Efthymia (Department of Economics, School of Business, Economics and Law, Göteborg University) |
| Abstract: | We introduce a model of strategic environmental policy where two firms compete à la Cournot in a third market under the presence of multiple pollutants. Two types of pollutants are introduced, a local and a transboundary one. The regulator can only control local pollution as transboundary pollution is regulated internationally. The strategic effect present in the original literature is also replicated in this setup. However, we illustrate that when transboundary pollution is regulated through the use of tradable emission permits instead of non-tradable ones then a new strategic effect appears which had not been identified thus far. In this case, local pollution increases further and welfare is lowered. We also provide evidence from the implementation of EU ETS over the pollution of PM10 and PM2.5.<p> |
| Keywords: | Environmental regulation; multiple pollutants; (non) tradable permits; strategic interactions |
| JEL: | F12 F18 Q58 |
| Date: | 2015–02 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:gunwpe:0610&r=cta |