|
on Contract Theory and Applications |
| By: | Ginger Zhe Jin; Michael Luca; Daniel Martin |
| Abstract: | A central prediction of information economics is that market forces can lead businesses to voluntarily provide information about the quality of their products, yet little voluntary disclosure is observed in the field. In this paper, we demonstrate that the inconsistency between theory and reality is driven by a fundamental failure in consumer inferences when sellers withhold information. Using a series of laboratory experiments, we implement a simple disclosure game in which senders can verifiably report quality to receivers. We find that senders disclose less often than equilibrium would predict. Receivers are not sufficiently skeptical about undisclosed information – they underestimate the extent to which no news is bad news. Senders generally take advantage of receiver mistakes. We find that providing disclosure rates by quality score helps to improve receiver inferences. |
| JEL: | C9 D8 K2 L51 |
| Date: | 2015–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:21099&r=cta |
| By: | Dessi, Roberta; Ristichini, Aldo |
| Abstract: | A large literature in psychology, and more recently in economics, has argued that monetary rewards can reduce intrinsic motivation. We investigate whether the negative impact persists when intrinsic motivation is strong, and test this hypothesis experimentally focusing on the motivation to undertake interesting and challenging tasks, informative about individual ability. We find that this type of task can generate strong intrinsic motivation, that is impervious to the effect of monetary incentives, particularly when the individual is "racing against himself". In our experiments, monetary incentives have no significant impact on performance. In a second experiment using the same kind of task but a setting designed to weaken intrinsic motivation, monetary incentives do have a significant, positive, effect on performance. This result confirms that our experimental setup may, with appropriate conditions, replicate the known crowding out effects. |
| Date: | 2015–04 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:29269&r=cta |
| By: | Maria Dementyeva; Erik T. Verhoef |
| Abstract: | This paper studies road safety and accident externalities when insurance companies have market power, and can influence road users' driving behaviour via insurance premiums. We obtain both welfare and profit maximizing marginal conditions for first- and second-best insurance premiums for monopoly and oligopoly market structures in insurance. The insurance program consists of an insurance premium, and marginal dependencies ("slopes") of that premium on speed and on the own safety technology choice. While a private monopolist internalizes accident externalities up to the point where compensations to users' benefit matches the full (immaterial) costs, in oligopolistic markets insurance firms do not fully internalize accident externalities that their customers impose upon one another. Therefore, non-optimal premiums as well as speed and technology control apply. Analytical results demonstrate how insurance firms' incentives to influence traffic safety deviate from socially optimal incentives. |
| Keywords: | Accident externalities, congestion externalities, traffic regulations, road safety,second-best, market power |
| JEL: | D43 D62 R41 R42 R48 |
| Date: | 2015–02–16 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20150025&r=cta |
| By: | Hiroshi Osano (Institute of Economic Research, Kyoto University); Keiichi Hori (Faculty of Economics, Ritsumeikan University) |
| Abstract: | In this paper, we explore a dynamic theory of investment and costly managerial turnover given agency conflicts between the firm manager and investors. We incorporate the possibility of the successive replacement of managers until the firm is finally liquidated, and develop a continuous-time agency model with the q-theory of investment. We derive the dynamic variations of average q, marginal q, and the optimal investment?capital ratio surrounding manager turnover. Furthermore, we also indicate that the firm’s optimal replacement/ retention decision becomes more permissive with the frequency of the replacement of managers. Our theoretical findings yield empirical implications for the joint dynamics of investment and CEO turnover policy, which are consistent with evidence provided by the existing empirical literature, and provide novel testable hypotheses. |
| Keywords: | average q, CEO turnover, continuous-time agency model, investment, marginal q |
| JEL: | D86 D92 G31 G32 M12 M51 |
| Date: | 2015–02 |
| URL: | http://d.repec.org/n?u=RePEc:kyo:wpaper:921&r=cta |
| By: | Christina M. Dalton; Gautam Gowrisankaran; Robert Town |
| Abstract: | Standard Medicare Part D drug insurance provides limited coverage in a ``donut hole'' region, making the purchase problem dynamic. We develop a discontinuity-based test for myopia using enrollees who arrived near the coverage gap early in the year. We find that there are fewer and cheaper purchases immediately after reaching the gap, providing evidence in favor of myopia. We structurally estimate a dynamic drug purchase model and find complete myopia. For a nationally representative sample, "behavioral hazard" increases enrollee spending by 41%. Entirely eliminating the gap would increase insurer spending 31%, compared to 6% for generic-only gap coverage. |
| JEL: | D03 I13 I18 L88 |
| Date: | 2015–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:21104&r=cta |
| By: | Nitika Bagaria (London School of Economics and Centre for Economic Performance); Barbara Petrongolo (Queen Mary University of London, Centre for Economic Performance and CEPR); John Van Reenen (London School of Economics, Centre for Economic Performance, NBER and CEPR) |
| Abstract: | Disability rolls have escalated in developed nations over the last 40 years. The UK, however, stands out because the numbers on these benefits stopped rising when a welfare reform was introduced that integrated disability benefits with unemployment insurance (UI). This policy reform improved job information and sharpened bureaucratic incentives to find jobs for the disabled (relative to those on UI). We exploit the fact that policy was rolled-out a quasi-random across geographical areas. In the long-run the policy improved the outflows from disability benefits by 6% and had an (insignificant) 1% increase in unemployment outflows. This is consistent with a model where information helps both groups, but bureaucrats were given incentives to shift effort towards helping the disabled find jobs and away from helping the unemployed. Interestingly, in the short-run the policy had a negative impact for both groups suggesting important disruption effects. The policy passes a dynamic cost-benefit calculation, but the costs of the organizational disruption implies that benefits take about six years to exceed the one-off set-up costs making it unattractive for (myopic) policy-makers. |
| Keywords: | Incentives, Public sector, Unemployment benefits, Performance standards |
| JEL: | H51 I13 J18 |
| Date: | 2015–04 |
| URL: | http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp742&r=cta |
| By: | Andrea Bellucci (Institute for Applied Economic Research (IAW) at the University of Tubingen); Alexander Borisov (University of Cincinnati); Germana Giombini (University of Urbino, Italy, and MoFiR, Ancona); Alberto Zazzaro (Polytechnic University of Marche, MoFiR and CSEF) |
| Abstract: | In this paper we empirically test the recent lender-based theory for the use of collateral in bank lending. Based on a proprietary dataset of loan contracts written by a local bank in competitive credit markets, we use the physical proximity between borrowers and the lending branch of the bank to capture its information advantage and the magnitude of collateral-related transaction costs. Overall, our results seem more consistent with several classic borrower-based explanations rather than with the lender-based view. We show that, conditional on obtaining credit from the local bank, more distant borrowers experience higher collateral requirements and lower interest rates. Moreover, competitive pressure from transaction lenders does not magnify the importance of lender-to-borrower distance. Our findings are also obtained with estimation techniques that allow for endogenous loan contract terms and joint determination of collateral and interest rates. JEL Classification: G21, G32, L11 |
| Keywords: | Distance, Collateral, Interest Rate, Bank lending. |
| Date: | 2015–04–18 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:401&r=cta |
| By: | Cabrales, Antonio; Gale, Douglas; Gottardi, Piero |
| Abstract: | This paper provides an introduction to the literature on financial contagion in networks. In the first part, we consider contagion via transmission of shocks, i.e. an abrupt drop in the flow of revenue to one firm, which affects other firms connected to it through financial linkages. We then study informational contagion, by which we mean the process whereby a shock to one market is transmitted to other markets by means of information revealed in the first market. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:eco2015/01&r=cta |
| By: | Martin Ravallion; Shaohua Chen |
| Abstract: | In what is probably the largest cash transfer program in the world today China’s Dibao program aims to fill all poverty gaps. In theory, the program creates a poverty trap, with 100% benefit withdrawal rate (BWR). But is that what we see in practice? The paper proposes an econometric method of estimating the mean BWR allowing for incentive effects, measurement errors and correlated latent heterogeneity. Under the method’s identifying assumptions, a feasible instrumental variables estimator corrects for incentive effects and measurement errors, and provides a bound for the true value when there is correlated incidence heterogeneity. The results suggest that past methods of assessing benefit incidence using either nominal official rates or raw tabulations from survey data are deceptive. The actual BWR appears to be much lower than the formal rate, and is also lower than the rate implied by optimal income tax models for poverty reduction. The paper discusses likely reasons based on qualitative observations from field work. The program’s local implementation appears to matter far more than incentives implied by its formal rules. |
| JEL: | H22 I32 I38 O12 |
| Date: | 2015–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:21111&r=cta |