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on Contract Theory and Applications |
| By: | Anne Bucher; Sébastien Ménard |
| Abstract: | We develop a two-period principal-agent model to investigate the effects of firing costs on self-selection mechanisms and on the optimal wage contracts under adverse selection. There are two types of risk-averse workers who differ by their ability. The worker’s ability is private information but revealed once engaged in production. The adverse selection problem may be solve by workers’ selection from a menu of separating contracts that specifies a sequence of wages with dismissal being the only form of punishment to a worker who overstated his ability. We find that as firing costs increase, the wage-tenure profile of high-ability workers gets steeper while the information rent left to low-ability workers vanishes. For higher levels of firing costs, an incentive menu of contracts provides the most able workers with a lower starting wage than the less able workers. As the expected profit from separating contracts decreases with dismissal costs, there exists a threshold above which the employer prefers to offer a pooling wage that might drive good workers out of the labor market. |
| Keywords: | Adverse Selection, Principal Agent, Labor Contracts, Wage, Firing Costs. |
| JEL: | D82 J31 J41 J08 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:ulp:sbbeta:2015-17&r=cta |
| By: | Spencer Bastani; Tomer Blumkin; Luca Micheletto |
| Abstract: | In this paper we allude to a novel role played by the non-linear income tax system in the presence of adverse selection in the labor market due to asymmetric information between workers and firms. We show that an appropriate choice of the tax schedule enables the government to affect the wage distribution by controlling the transmission of information in the labor market. This represents an additional channel through which the government can foster the pursuit of its redistributive goals. |
| Keywords: | Adverse selection, labor market, optimal taxation, pooling, redistribution |
| Date: | 2015–06 |
| URL: | http://d.repec.org/n?u=RePEc:don:donwpa:077&r=cta |
| By: | Germà Bel (Faculty of Economics, University of Barcelona); Francisco González-Gómez (Faculty of Economics, University of Granada); Andrés J. Picazo-Tadeo (Faculty of Economics, University of Valencia) |
| Abstract: | Political corruption is a type of market failure. One area of public policy where corruption is relatively common is the contracting out of public services. Private firms can improve their chances of obtaining contracts by bribing politicians or public servants and funding political parties. In the same vein, firms can gain access to policy makers by hiring influential former politicians –a practice commonly referred to as revolving-doors. In Spain, a number of corruption cases, involving all the major political parties, are presently under judicial investigation. Some of these cases involve water contracts. Also, there is evidence showing that private firms have been funding political parties as well as hiring former politicians for top positions. In this paper, we use information from 892 privatizations of water services in Spanish municipalities between 1984 and 2014 and logistic multinomial regression techniques to study the association between specific firms securing contracts and the political parties ruling the municipalities. We find evidence of a systematic association between the Popular Party (Partido Popular or PP) and the firm, Aqualia, part of the large Spanish holding company, Fomento de Construcciones y Contratas (FCC), which is known to have funded the PP. Furthermore, former PP politicians have been appointed to top positions in the FCC board of directors. |
| Keywords: | Corruption; political connections; privatization; contracting out; urban water services; Spain JEL classification: D73; L33; L95 |
| Date: | 2015–06 |
| URL: | http://d.repec.org/n?u=RePEc:ira:wpaper:201515&r=cta |
| By: | Mei Li (Department of Economics and Finance, University of Guelph); Frank Milne (Department of Economics, Queen’s University); Junfeng Qiu (Economics and Management Academy, Central University of Finance and Economics) |
| Abstract: | This paper establishes a theoretical model to examine the LOLR policy when a central bank can distinguish solvent banks from insolvent ones only imperfectly. The major results that our model produces are as follows: (1) The pooling equilibria in which, on one hand, all the banks borrow from the central bank and, on the other hand, all the banks do not borrow from the central bank could exist given certain market beliefs off the equilibrium path. However, neither equilibrium is socially efficient because insolvent banks will continue to hold their unproductive assets, rather than efficiently liquidating them. (2) Higher precision in central bank screening will improve social welfare not only by identifying insolvent banks and forcing them to efficiently liquidate their assets, but also by reducing moral hazard and deterring banks from choosing risky assets in the first place. (3) If a central bank can commit to a specific precision level before the banks choose their assets, rather than conducting a discretionary LOLR policy, it will choose a higher precision level to reduce moral hazard and will attain higher social welfare. |
| Keywords: | Central Bank Screening; Moral Hazard; Lender of Last Resort |
| JEL: | E58 G20 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:gue:guelph:2015-06&r=cta |
| By: | Zareena Begum Irfan (Madras School of Economics); Bina Gupta (Department of Environmental Science, Indian Institute of Technology Roorkee, Roorkee, Uttarakhand) |
| Abstract: | Constitutionally in India, the individual states have responsibility for water, forests, and agriculture. Major canal irrigation accounts for over 80 percent of India's irrigation. The intensive wheat irrigated system in Haryana and Uttar Pradesh states of India is observed to analyze the impact of incentive mechanism favoring the crop yield and water use. The regions selected for the present study are built on a long tradition of canal irrigation. Findings from farm surveys are used to examine water management and water productivity in the Haryana and Uttar Pradesh state. Attributes of the irrigation sources help explain the widespread interest in groundwater use and the relative demise of canal water use. Sole consumption of groundwater as irrigation source was altered by the initiation of conjunctive water of both surface and ground through the incentive pathway by municipal level irrigation managers. A combination of technological, land use and market based approaches is likely to be most effective in achieving sustainable water management in these intensive cereal systems. Based on the data set for the Indo-Gangetic Plain, the overall goal of this paper was to examine how the irrigation management reform has proceeded since the early stages of implementation and what the impacts are of the incentive mechanisms on water use and crop yields. The results show that irrigation management reform has accelerated in the study sites. The econometric model results indicate that using incentive mechanisms to promote water savings is effective under the arrangement of contracting management. However, if incentives are provided to the irrigation managers, the wheat yield declines significantly. The results imply that at the later stage of the reform, the cost of reducing water use by providing incentives to managers includes negative impacts on crop yields. Therefore, the design of win–win supporting policies is aimed to be achieved from the present study to ensure the healthy development of the irrigation management reform. |
| Keywords: | Canal Irrigation, Incentive, Water Use, Crop yield |
| JEL: | Q15 Q25 Q18 |
| Date: | 2015–04 |
| URL: | http://d.repec.org/n?u=RePEc:mad:wpaper:2015-101&r=cta |