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on Contract Theory and Applications |
| By: | Sun, Bo; Liu, Qi |
| Abstract: | This paper studies how private information in hedging outcomes affects the design of managerial compensation when hedging instruments serve as a double-edged sword in that they may be used for both corporate hedging and earnings management. On the one hand, financial vehicles can offer customized contracts that are closely tailored to manage specific risk and improve hedging efficiency. On the other hand, involvement in hedging may give rise to manipulation through misstatement of the value estimates. We show that the use of privately-observed hedging may actually require greater pay-for-performance in managerial compensation. The cross-sectional variations in managerial compensation lend support to our model. |
| Keywords: | Managerial compensation ; Corporate hedging |
| JEL: | D82 D86 G38 J31 |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1160&r=cta |
| By: | Strausz, Roland |
| Abstract: | Crowdfunding provides innovation in that it enables entrepreneurs to contract with consumers before investment. Under aggregate demand uncertainty, this improves screening for valuable projects. Entrepreneurial moral hazard threatens this benefit. Studying the subsequent trade-off between screening and moral hazard, the paper characterizes optimal mechanisms. Popular all-or-nothing reward-crowdfunding schemes reflect their salient features. Efficiency is sustainable only if returns exceed investment costs by a margin reflecting the degree of moral hazard. Constrained efficient mechanisms exhibit underinvestment. As a screening tool for valuable projects, crowdfunding promotes social welfare. Crowdfunding complements rather than substitutes traditional entrepreneurial financing. |
| Keywords: | aggregate demand uncertainty; Crowdfunding; entrepreneurship; moral hazard; venture capital |
| JEL: | D82 G32 L11 M31 |
| Date: | 2016–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11222&r=cta |
| By: | Lester, Benjamin (Federal Reserve Bank of Philadelphia); Shourideh, Ali (The Wharton School of the University of Pennsylvania); Venkateswaran, Venky (NYU–Stern School of Business); Zetlin-Jones, Ariel (Carnegi Mellon University) |
| Abstract: | We incorporate a search-theoretic model of imperfect competition into an otherwise standard model of asymmetric information with unrestricted contracts. We develop a methodology that allows for a sharp analytical characterization of the unique equilibrium and then use this characterization to explore the interaction between adverse selection, screening, and imperfect competition. On the positive side, we show how the structure of equilibrium contracts—and, hence, the relationship between an agent’s type, the quantity he trades, and the corresponding price—is jointly determined by the severity of adverse selection and the concentration of market power. This suggests that quantifying the effects of adverse selection requires controlling for the market structure. On the normative side, we show that increasing competition and reducing informational asymmetries can be detrimental to welfare. This suggests that recent attempts to increase competition and reduce opacity in markets that suffer from adverse selection could potentially have negative, unforeseen consequences |
| Keywords: | Adverse selection; Imperfect competition; Screening; Transparency; Search theory |
| JEL: | D41 D42 D43 D82 D83 D86 L13 |
| Date: | 2016–03–10 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:16-10&r=cta |
| By: | Stefano Colonnello |
| Abstract: | I model the joint effects of debt, macroeconomic conditions, and cash flow cyclicality on risk-shifting behavior and managerial pay-for-performance sensitivity. I show that risk-shifting incentives rise during recessions and that the shareholders can eliminate such adverse incentives by reducing the equity-based compensation in managerial contracts. I also show that this reduction should be larger in highly procyclical firms. Using a sample of U.S. public firms, I provide evidence supportive of the model’s predictions. First, I find that equity-based incentives are reduced during recessions. Second, I show that the magnitude of this effect is increasing in a firm’s cash flow cyclicality. |
| Keywords: | risk-shifting, executive compensation, business cycle |
| JEL: | G32 J33 M52 |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:iwh:dispap:6-16&r=cta |
| By: | Benito Arruñada |
| Abstract: | In "The Problem of Social Cost", Coase (1960) used a simplified conception of property rights as the outcome of mere contracting in independent exchanges. This conception has been suitable for successfully analyzing many important issues, including that of externalities related to the use of assets and public goods. However, its implicit assumption that exchange in property rights does not affect future transaction costs provides an inadequate basis for understanding property institutions and has caused confusion on the efficacy of private ordering and the role of the state and legal institutions. It has thus limited the scope of most of the economics of so-called property rights to analyses of political interactions and contract rights in personal exchanges. In the real world, property is defined by interaction between multiple exchanges which cause exchange-related non-contractible externalities among market participants. When such exchange-related externalities are considered, property becomes inherently linked to public and legal interventions, which are indispensable to reach true property—that is, in rem—enforcement and truly impersonal—asset-based—exchange. |
| Keywords: | Property rights, Externalities, enforcement, transaction costs, public ordering, private ordering, impersonal exchange |
| JEL: | D23 K11 K12 L85 G38 H41 O17 P48 |
| Date: | 2016–04 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:895&r=cta |
| By: | Castellares, Renzo (Banco Central de Reserva del Perú); Salas, Jorge (International Monetary Fund) |
| Abstract: | We build a simple trade model in which: (i) exporters are paid after delivery of the goods, and (ii) complementarity exists between procyclical contract enforcement at the importing-country level and contractual vulnerability at the industry level. In the model, an adverse aggregate shock in the importing country generates a disproportionate decline in imports in more contractually vulnerable industries. Using disaggregated bilateral trade data for more than 100 countries, we find robust support for the model’s predictions. Our empirical approach exploits the variation in the occurrence of recessions and financial crises across countries from 1989 to 2006, and the variation in contractual dependence across manufacturing industries. The estimated amplification effects of contractual dependence on sectoral imports are statistically significant and economically important. Our analysis uses different industry measures of contractual vulnerability, including measures of product complexity and a novel indicator of uncollectible credit sales. |
| Keywords: | Trade, recessions, financial crises, contract enforcement, default risk, industry-level data |
| JEL: | F1 F41 G01 G32 |
| Date: | 2016–04 |
| URL: | http://d.repec.org/n?u=RePEc:rbp:wpaper:2016-001&r=cta |