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on Contract Theory and Applications |
| By: | Calcagno, Riccardo; Heider, Florian |
| Abstract: | This paper studies the usefulness of making the income of a CEO depend on the stock price of the firm he runs. We assume the stock market is efficient and find that other public information about CEO performance, e.g., accounting information, is not used to determine CEO pay. But because of the feedback loop between CEO actions and the stock price, the price does not fully reflect the consequences of CEO shirking for the value of the firm. The optimal incentive contract increases stock-based pay in order to increase the sensitivity of CEO income to shirking and thus deter it. This effect is stronger when traders have worse information, which can explain the prevalence of stock-based pay in hard-to-value firms. Our model derives a measure of the wedge between financial and economic efficiency, and generates new insights about the role of market conditions such as liquidity for optimal pay contracts. |
| Keywords: | efficient markets; information aggregation; liquidity; market-based pay |
| JEL: | D86 G14 G34 |
| Date: | 2016–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11298&r=cta |
| By: | Miguel A. Fonseca (Department of Economics, University of Exeter); Francesco Giovannoni (Department of Economics, CSE and CMPO, University of Bristol); Miltiadis Makris (Department of Economics, University of Southampton) |
| Abstract: | We consider auctions where bidders have external incentives and focus on the case where their valuations in the auction are positively correlated with their productivity which matters in a second stage job market. We study how this affects bidding behavior and wages in the job market and proceed to test the model’s implication in an experiment where treatments differ according to which bids are disclosed. Our results broadly confirm the theoretical prediction that bidders tend to overbid, and their bidding behavior and wages are influenced by the disclosure rule. The data also suggests that the dispersion in worker wages is affected by the disclosure rule, suggesting the importance of reputational bidding. |
| Keywords: | Auctions, signaling, disclosure, experiments. |
| JEL: | C92 D44 D82 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:exe:wpaper:1602&r=cta |
| By: | Anthony Yezer (Department of Economics/Institute for International Economic Policy, George Washington University); Pingkang Yu |
| Abstract: | This paper analyzes a credit market that includes a costly, universal and imperfect screening technology with both type I and type II errors and borrower self-selection. Universal screening is necessary because there are fraudulent borrowers. These characteristics, which have been omitted from other models, make it more representative of actual mortgage and consumer lending conditions. Contrary to the results in previous models with random screening, the combination of universal screening and type I screening error produces a pooling equilibrium as a non-trivial outcome. This result suggests that generalized lenders can sometimes compete with specialized lenders serving a single borrower type in credit markets that rely on costly lender screening. At other times pooling lenders will not be competitive and this, by itself, could lead to periodic waves of failure. These theoretical results appear to have implications for stability in markets for consumer credit. |
| Keywords: | costly screening, screening cost, self selection, pooling equilibrium, separating equilibrium |
| JEL: | D82 D86 G20 L16 |
| Date: | 2016–05 |
| URL: | http://d.repec.org/n?u=RePEc:gwi:wpaper:2016-4&r=cta |
| By: | Pates, Nicholas J.; Hendricks, Nathan P. |
| Abstract: | Voluntary incentive payments, also known green subsidies are a popular method to incentivize farmers into adopting environmentally friendly practices. The United States Department of Agriculture’s (USDA) latest budget directs over 4.5 billion dollars toward programs like the Conservation Reserve Program (CRP), the Environmental Quality Incentives Program (EQIP), and the Conservation Stewardship Program (CStP) and plans to have 380 million acres enrolled in these programs in 2016. The prominence of these programs mean both conservationists and taxpayers have a serious stake in their effectiveness. One concern with these programs is that they may provide little additional environmental benefits relative to what would have occurred in the absence of the program. This paper performs a discrete dynamic optimization simulation to study additionality in a dynamic environment. This allows us to directly study moral hazard as it relates to non-additionality and even delayed adoption from green payment programs. We show that larger programs do not necessarily generate more additionality and that especially poor policies can slow green practice diffusion. |
| Keywords: | additionality, diffusion, moral hazard, adverse selection, dynamic, policy, environmental, Environmental Economics and Policy, Resource /Energy Economics and Policy, |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea16:236066&r=cta |
| By: | Li, Xiaokang; Guo, Hongdong; Li, Lin |
| Abstract: | Contract farming in development countries has become popular, and this is the same for vegetable production in China. The purpose of this paper is to investigate the impact of production attributes of different vegetables on farmers’ decision of contract farming participation, as well as examine the impact of marketing contracts on net returns. The results revealed that the harvest and marketing times, perishability, certification of the vegetables, and price fluctuation have significantly positive effect on vegetable farmers’ contract farming participation, respectively. A PSM method is employed to estimate the impact of contract farming on net returns of vegetable production, and find out the effect is insignificant. |
| Keywords: | contract farming, vegetable production, transaction cost, China, Agricultural and Food Policy, Crop Production/Industries, |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea16:235573&r=cta |
| By: | Walsh, Darragh; Malaguzzi Valeri, Laura; Di Cosmo, Valeria |
| Abstract: | Market power often emerges in wholesale electricity markets. Regulators use several strategies to limit market power: adopting bidding rules, compulsory forward markets and enhancing demand response. We study the case of the Irish Single Electricity Market (SEM), where the market will eliminate strict bidding rules to comply with the European Target Electricity Model. Using the PLEXOS unit-commitment model, we simulate the price that emerges in Cournot competition and find that it is more than 60% higher than in perfect competition. We then study how much the price varies with three measures that influence market power. Limiting thermal generators’ ownership of wind generation does not affect prices. Forcing the largest firm to sell some of its output forward decreases prices, but keeps them well above competitive levels. The most effective measure is an increase in price elasticity of demand, although existing evidence shows that it is hard to achieve. We conclude that regulatory oversight of bids will have to continue, although the Target Model will be associated with limited transparency, creating further challenges. |
| Keywords: | regulation; oligopoly; wind generation; forward contracts; demand response |
| JEL: | L1 L9 |
| Date: | 2016–05–20 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:71502&r=cta |