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on Contract Theory and Applications |
| By: | Lionel de BOISDEFFRE |
| Abstract: | We consider a pure exchange financial economy, where rational agents, possibly asymmetrically informed, forecast prices privately, with no model of how they are determined. Therefore, agents face both 'exogenous uncertainty', on the future state of nature, and 'endogenous uncertainty', on the future price. At a sequential equilibrium, all consumers expect the 'true' price as a possible outcome and elect optimal strategies at the first period, which clear on all markets, ex post. The paper's purpose is twofold. First, it defines no-arbitrage prices, which comprise all equilibrium prices, and displays their revealing properties. Second, it shows, under mild conditions, that a sequential equilibrium always exists in this model, whatever agents' prior beliefs or the financial structure. This outcome suggests that standard existence problems, which followed Hart (1975) and Radner (1979), stem from the rational expectation and perfect foresight assumptions of the classical model. |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:tac:wpaper:2014-2015_7&r=cta |
| By: | Daniel Ferreira (London School of Economics); Radoslawa Nikolowa (Queen Mary University of London) |
| Abstract: | We develop a model in which competition in the labor market may produce worker-firm matches that are inferior to those obtained in the absence of competition. This result contrasts with the conventional wisdom that competition among employers allocates scarce talent efficiently. In a model in which employers asymmetrically learn about the ability of their workers, we show that constraining labor market competition may be socially desirable precisely because it leads to better talent allocation. The model provides a cautionary counterpoint to one of the most popular arguments against the regulation of pay, i.e., the argument that price-distorting regulation leads to inefficient matches of workers and firms. |
| Keywords: | Labor markets, Asymmetric employer learning, Misallocation, Adverse selection |
| JEL: | D82 J31 M5 |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp740&r=cta |
| By: | Roland Bénabou; Davide Ticchi; Andrea Vindigni |
| Abstract: | In earlier work (Bénabou, Ticchi and Vindigni 2013) we uncovered a robust negative association between religiosity and patents per capita, holding across countries as well as US states, with and without controls. In this paper we turn to the individual level, examining the relationship between religiosity and a broad set of pro- or anti-innovation attitudes in all five waves of the World Values Survey (1980 to 2005). We thus relate eleven indicators of individual openness to innovation, broadly defined (e.g., attitudes toward science and technology, new versus old ideas, change, risk taking, personal agency, imagination and independence in children) to five different measures of religiosity, including beliefs and attendance. We control for all standard socio-demographics as well as country, year and denomination fixed effects. Across the fifty-two estimated specifications, greater religiosity is almost uniformly and very significantly associated to less favorable views of innovation. |
| JEL: | O3 O31 O4 Z1 Z12 |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:21052&r=cta |
| By: | Jean-Michel Benkert |
| Abstract: | We study the bilateral trade problem put forward by Myerson and Satterthwaite (1983) under the assumption that agents are loss-averse. We use the model developed by Kőszegi and Rabin (2006, 2007) to find optimal mechanisms for the minimal subsidy, revenue maximization and welfare maximization problem. In both, welfare and revenue maximizing mechanisms, the designer induces less trade in the presence of loss-aversion. Intuitively, the designer is providing the agents with partial insurance. Moreover, the designer optimally provides the agents with full insurance in the money dimension, i.e. she offers deterministic transfers. Another implication of loss-aversion is that it increases the severity of the impossibility problem, that is, the minimal subsidy needed to induce materially efficient trade is higher. All results display robustness to the exact specification of the reference point. We also provide some general mechanism design results. |
| Keywords: | Bilateral trade, loss-aversion, mechanism design, deterministic transfers |
| JEL: | C78 D02 D03 D82 D84 |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:zur:econwp:188&r=cta |
| By: | Stefania Albanesi (Federal Reserve Bank of New York); Claudia Olivetti (Boston University and NBER); Maria Jose Prados (University of Southern California) |
| Abstract: | We document three new facts about gender differences in executive compensation. First, female executives receive lower share of incentive pay in total compensation relative to males. This difference accounts for 93% of the gender gap in total pay. Second, the compensation of female executives displays lower pay-performance sensitivity. A $1 million dollar increase in firm value generates a $17,150 increase in firm-specific wealth for male executives and a $1,670 increase for females. Third, female executives' compensation is more sensitive to bad firm performance and less sensitive to good firm performance. We find no link between firm performance and the gender of top executives. We discuss evidence on differences in preferences and the cost of managerial effort by gender and examine the resulting predictions for the structure of compensation. We consider two paradigms for the pay-setting process, the efficient contracting model and the "managerial power" or skimming view. The efficient contracting model can explain the first two facts. Only the skimming view is consistent with the third fact. This suggests that the gender differentials in executive compensation may be inefficient. |
| Keywords: | sensitivity, performance incentives, managerial power, skimming, efficient contracts |
| JEL: | J31 M12 J41 |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:hka:wpaper:2015-004&r=cta |
| By: | Philipp Ager (University of Southern Denmark); Antonio Ciccone (Mannheim University and Barcelona GSE) |
| Abstract: | Building on the idea that members of religious communities insure each other against some idiosyncratic risks, we argue that religious communities should be more widespread where populations face greater common risk. Our empirical analysis exploits rainfall risk as a source of common agricultural risk in the nineteenth-century United States. We show that a greater share of the population was organized into religious communities in counties with greater rainfall risk. The link between rainfall risk and membership in religious communities is stronger among more agricultural counties and counties exposed to greater rainfall risk during the growing season. |
| Keywords: | Religious community membership, agricultural risk, informal insurance |
| JEL: | Z12 O13 N31 |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:hes:wpaper:0074&r=cta |
| By: | Lance Lochner (University of Western Ontario); Alexander Monge-Naranjo (Federal Reserve Bank of St. Louis) |
| Abstract: | Rising costs of and returns to college have led to sizeable increases in the demand for student loans in many countries. In the U.S., student loan default rates have also risen for recent cohorts as labor market uncertainty and debt levels have increased. We discuss these trends as well as recent evidence on the extent to which students are able to obtain enough credit for college and the extent to which they are able to repay their student debts after. We then discuss optimal student credit arrangements that balance three important objectives: (i) providing credit for students to access college and finance consumption while in school, (ii) providing insurance against uncertain adverse schooling or post-school labor market outcomes in the form of income-contingent repayments, and (iii) providing incentives for student borrowers to honor their loan obligations (in expectation) when information and commitment frictions are present. Specifically, we develop a two-period educational investment model with uncertainty and show how student loan contracts can be designed to optimally address incentive problems related to moral hazard, costly income veri cation, and limited commitment by the borrower. We also survey other research related to the optimal design of student loan contracts in imperfect markets. Finally, we provide practical policy guidance for re-designing student loan programs to more efficiently provide insurance while addressing information and commitment frictions in the market. |
| Keywords: | human capital, borrowing, student loans, default, repayment, income-contingent, credit constraints |
| JEL: | D14 D82 H21 H52 I22 I24 J24 |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:hka:wpaper:2015-006&r=cta |
| By: | Bradler, Christiane |
| Abstract: | Economic theory suggests that performance pay may serve as an effective screening device to attract productive agents. The existing evidence on the self-selection of agents is largely limited to job tasks where performance is driven by routine, well-defined procedures. This study presents evidence for a creative task and studies how agents self-select into a tournament-based scheme vs. a fixed pay scheme. The experiment allows for the measurement of creative productivity, risk preferences, self-assessments, gender, and other socio-economic characteristics such as the Big Five personality traits. Results show that the two payment schemes systematically attract agents with different characteristics. However, results differ fundamentally from previously found patterns. Agents did not self-select into the tournament scheme according to their creative productivity, but only according to their risk attitudes and self-assessments. The reason for the absence of a selection of the most creative agents into the tournament is that there exist substantial misjudgments of relative creative productivity. Further evidence from a representative German survey data set provides additional support for the experimental results suggesting external validity. |
| Keywords: | performance pay,tournaments,selection,sorting,creativity,experiment |
| JEL: | C91 D03 J33 M52 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:zewdip:15021&r=cta |
| By: | Arthur Schram; Jordi Brandts; Klarita Gërxhani |
| Abstract: | Competition typically involves two main dimensions, a rivalry for resources and the ranking of relative performances. If socially recognized, the latter yields a ranking in terms of social status. The rivalry of resources resulting from interacting under a competitive incentive scheme has been found to negatively affect women’s performance relative to that of men. However, little is known about gender differences in the performance consequences of status ranking. We find that in anticipation of ranking women perform more poorly than men while there is no performance difference without status ranking. This is important because recent studies argue that women may be underrepresented in top positions because they shy away from –and sometimes underperform under– competition. It has been argued that adapting the institutions under which competition takes place could improve women’s position. Our results suggest that increased participation in competitive environments could harm women’s labor market success along a different channel. We thus highlight an overlooked impediment for workplace promotion of women that may have major implications for the design of labor market competitions. |
| Keywords: | status, competition, gender, experiments |
| JEL: | C91 J16 |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:817&r=cta |