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on Contract Theory and Applications |
| By: | Saki Bigio; Liyan Shi |
| Abstract: | We study repurchase options (repo contracts) in a competitive asset market with asymmetric information. Gains from trade emerge from a liquidity need, but private information about asset quality prevents the full realization of trade. We obtain a unique equilibrium, which features a pooling repo contract and full participation among borrowers. The equilibrium repo contract resolves adverse selection: the embedded repurchase option prevents the market unraveling that occurs in asset-sale markets. However, the contract is inefficient due to cream skimming. Competition to attract high-quality borrowers through the terms of the repurchase option inefficiently lowers liquidity. The equilibrium contract has a closed form and is portable to many applications. |
| JEL: | D82 G23 G32 |
| Date: | 2020–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27732&r=all |
| By: | Sugata Marjit; Suryaprakash Mishra |
| Abstract: | In a Cournot oligopoly set up with constant marginal cost and linear demand, innovation is rewarding. In this paper we work with a Cournot oligopoly framework with increasing marginal cost and linear demand and show that innovation may not be rewarding. We endogenize the success probability of R&D and its response to the intensity of competition and specifically show that if the technology is already advanced and competition intensifies then firms wouldn’t innovate. The dynamic interaction we attempt to capture and explain is the one of technology with the possibility of innovation via the intensity of competition. We finally conclude that the intensity of competition and welfare may not have the usual (direct) relationship and suggest ‘monitored competition’, wherein initially (at initial stages of innovation) competition is encouraged and then (at later stages of innovation) curtailed, to encourage innovation and thus welfare, as a suitable policy measure. Thus, entry should be restricted in order to foster innovation while innovation itself encourages entry. |
| Keywords: | quadratic costs, innovation, welfare, technology |
| JEL: | L11 L13 L21 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_8524&r=all |
| By: | Garrett, Daniel F. |
| Abstract: | In the context of a canonical agency model, we study the payo implications of introducing optimally-structured incentives. We do so from the perspective of an analyst who does not know the agent's preferences for responding to incentives, but does knowthat the principal knows them. We provide, in particular, tight bounds on the principal's expected benet from optimal incentive contracting across feasible values of the agent's expected rents. We thus show how economically relevant predictions can be made robustly given ignorance of a key primitive. |
| Keywords: | asymmetric information, mechanism design, robustness, procurement |
| JEL: | D82 |
| Date: | 2020–09–07 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:124664&r=all |