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on Contract Theory and Applications |
| By: | Trigilia, Giulio (University of Warwick) |
| Abstract: | Firms seeking external financing jointly choose what securities to issue, and the extent of their disclosure commitments. The literature shows that enhanced disclosure reduces the cost of financing. This paper analyses how disclosure affects the optimal composition of financing means. It considers a market where firms compete for external financing under costly-state-verification, but,in contrast to the standard model : (i) the degree of asymmetric information between firms and outside investors is variable, and (ii) firms can affect it through a disclosure policy, modeled as a verifiable signal with a cost decreasing in its noise component. Two central predictions emerge. On the positive side, optimal disclosure and leverage are negatively correlated. Efficient equity financing requires that firms are sufficiently transparent, whereas debt does not; it solely relies on the threat of bankruptcy and liquidation. Therefore, more transparent firms issue cheaper equity and face a higher opportunity cost of leveraged external financing. The prediction is shown to be consistent with the behavior of US corporations since the 1980s. On the normative side, disclosure externalities and time inconsistencies lead to under-disclosure and excessive leverage relative to the constrained best. If mandatory disclosures are feasible { that is, they cannot be easily dodged { they increase welfare. Otherwise, endogenously higher transparency can be triggered if regulators set capital requirements. Capital regulation proves especially useful when (i) firm performances are highly correlated, and (ii) disclosure requirements can be easily dodged { conditions that seem to apply to large financial firms. The view of capital standards as a means to improve the information environment is novel in the literature; its policy implications and challenges are discussed. |
| Keywords: | leverage ; costly-state-verification ; disclosure ; asymmetric information ; capital requirements ; financial regulation ; optimal contracting JEL classification numbers: D82 ; G21 ; G32 ; G38 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:wcreta:18&r=cta |
| By: | Gabriel Garber; Márcio Issao Nakane |
| Abstract: | We study two-sided markets where there are buyers and sellers, with heterogeneous participants on each side. Buyers care about the quality of the good purchased, but sellers care only about the price they get. When there is informational asymmetry about types between the sides, the role of a platform as a certifier that guarantees a minimum quality becomes central to the transactions. We analyze first-best (perfect information) and pooling equilibria without platforms and a monopolist platform that coexists with an external pooling. We also show there is no equilibrium in a simultaneous game with two platforms. |
| Keywords: | Platforms; two-sided markets; heterogeneous agents; certification. |
| JEL: | D42 D43 D82 D85 L12 L13 L15 L81 |
| Date: | 2016–01–29 |
| URL: | http://d.repec.org/n?u=RePEc:spa:wpaper:2016wpecon2&r=cta |
| By: | Louis-Gaëtan Giraudet (CIRED - Centre International de Recherche sur l'Environnement et le Développement - CNRS - Centre National de la Recherche Scientifique - CIRAD - Centre de coopération internationale en recherche agronomique pour le développement - EHESS - École des hautes études en sciences sociales - École des Ponts ParisTech (ENPC) - AgroParisTech - AgroParisTech); Sébastien Houde (University of Maryland) |
| Abstract: | We investigate how moral hazard problems can cause sub-optimal investment in energy efficiency, a phenomenon known as the energy efficiency gap. We focus on contexts where both the seller and the buyer of an energy saving technology can take hidden actions. For instance, a home retrofit contractor may cut on the quality of installation to save costs, while the homeowner may increase her use of energy service when provided with higher energy efficiency. As a result, neither energy efficiency quality nor energy use are fully contractible. We formalize the double moral hazard problem and discuss how it can help rationalize the energy efficiency gap. We then compare two policy instruments: minimum quality standards and energy-savings insurance. Their relative efficiency depends on the balance between the monitoring costs associated with the former and the deadweight loss of the consumer's action induced by the latter. Calibrating the model to the U.S. retrofit industry, we find that at current market conditions, standards tend to outperform insurance. We also find that the welfare gains from undoing the double moral hazard are substantially larger than those from internalizing carbon dioxide externalities associated with underlying energy use. |
| Keywords: | Energy efficiency gap, moral hazard, energy-savings insurance, minimum quality standard, credence good, rebound effect. |
| Date: | 2015–04–30 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-01260907&r=cta |
| By: | Demirgüç-Kunt, A.; Horváth, Bálint (Tilburg University, Center For Economic Research); Huizinga, Harry (Tilburg University, Center For Economic Research) |
| Abstract: | In an approach analogous to Rajan and Zingales (1998), we examine how the ability to access long-term debt affects firm-level growth volatility. We find that firms in industries with stronger preference to use long-term finance relative to short-term finance experience lower growth volatility in countries with better-developed financial systems, as these firms may benefit from reduced refinancing risk. Institutions that facilitate the availability of credit information and contract enforcement mitigate refinancing risk and therefore growth volatility associated with short-term financing. Increased availability of long-term finance reduces growth volatility in crisis as well as non-crisis periods. |
| Keywords: | debt maturity; finanical dependence; firm volatiliy; financial development |
| JEL: | G20 G32 O16 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:tiu:tiucen:59312b2d-3418-4a1c-be24-49f1825cc552&r=cta |
| By: | Christophe J. GODLEWSKI (LaRGE Research Center, Université de Strasbourg) |
| Abstract: | I study the impact of bank loan renegotiation on the design of financial contracts. Debt renegotiation can be beneficial for borrowers and lenders but its impact on the design of financial contracts is less clear. However, contract design is crucial for borrower’s investment, operating and financing policies. I find that the design of renegotiated credit agreements is not homogenous. Main renegotiation packages contain amendments to loan amount and maturity. I show that secured loans with longer maturities experience broader amendments. Creditors’ friendly environment and the presence of reputable, sound, and profitable lenders have a similar effect. |
| Keywords: | financial contracts design, bank loans, debt renegotiation. |
| JEL: | G10 G21 G24 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:lar:wpaper:2016-03&r=cta |
| By: | Blader, Steven; Gartenberg, Claudine; Prat, Andrea |
| Abstract: | This paper investigates how the success of a management practice depends on the nature of the long-term relationship between the firm and its employees. A large US transportation company is in the process of fitting its trucks with an electronic on-board recorder (EOBR), which provide drivers with information on their driving performance. In this setting, a natural question is whether the optimal managerial practice consists of: (1) Letting each driver know his or her individual performance only; or (2) Also providing drivers with information about their ranking with respect to other drivers. The company is also in the first phase of a multi-year "lean-management journey", which corresponds to an overhaul of the relational contract with its employees. This phase focuses exclusively on changing employee values, mainly toward a greater emphasis on teamwork and empowerment. The main result of our randomized experiment is that (2) leads to better performance than (1) in a particular site if and only if the site has not yet received the values intervention, and worse performance if it has. The result is consistent with the presence of a conflict between competition-based managerial practices and a cooperation-based relational contract. More broadly, it highlights the role of intangible relational factors in determining the optimal set of managerial practices. |
| Keywords: | management; relational contracts; relative ranking |
| JEL: | D2 |
| Date: | 2016–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11057&r=cta |