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on Contract Theory and Applications |
| By: | Philippe De Donder; Marie-Louise Leroux; François Salanié |
| Abstract: | Advantageous (or propitious) selection occurs when an increase in the premium of an insurance contract induces high-cost agents to quit, thereby reducing the average cost among remaining buyers. Hemenway (1990) and many subsequent contributions motivate its advent by differences in risk-aversion among agents, implying different prevention efforts. We argue that it may also appear in the absence of moral hazard, when agents only differ in riskiness and not in (risk) preferences. We first show that profit-maximization implies that advantageous selection is more likely when markup rates and the elasticity of insurance demand are high. We then move to standard settings satisfying the single-crossing property and show that advantageous selection may occur when several contracts are offered, when agents also face a non-insurable background risk, or when agents face two mutually exclusive risks that are bundled together in a single insurance contract. We exemplify this last case with life care annuities, a product which bundles long-term care insurance and annuities, and we use Canadian survey data to provide an example of a contract facing advantageous selection. |
| Keywords: | Propitious selection, positive or negative correlation property, contract bundling, long-term care insurance, annuity. |
| JEL: | D82 I13 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:rsi:creeic:2203&r= |
| By: | Aroon Narayanan |
| Abstract: | I study a game of strategic exploration with private payoffs and public actions in a Bayesian bandit setting. In particular, I look at cascade equilibria, in which agents switch over time from the risky action to the riskless action only when they become sufficiently pessimistic. I show that these equilibria exist under some conditions and establish their salient properties. Individual exploration in these equilibria can be more or less than the single-agent level depending on whether the agents start out with a common prior or not, but the most optimistic agent always underexplores. I also show that allowing the agents to write enforceable ex-ante contracts will lead to the most ex-ante optimistic agent to buy all payoff streams, providing an explanation to the buying out of smaller start-ups by more established firms. |
| Date: | 2022–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2205.06107&r= |
| By: | Gwen-Jiro Clochard; Guillaume Hollard; Julia Wirtz |
| Abstract: | Relative performance feedback (RPF) allows agents to compare their performance to that of others. Current theory assumes that RPF affects performance by changing the optimal level of effort. We introduce a technology channel in which agents use RPF to improve their technologies. We compare the effort and technology channels by combining three elements: an extensive review, an original model and two field experiments. Under the technology channel, we highlight that RPF increases performance even at the bottom of the distribution and has a cumulative effect across periods. We draw implications for education and social norms. |
| Date: | 2022–05–23 |
| URL: | http://d.repec.org/n?u=RePEc:bri:uobdis:22/767&r= |
| By: | Erik Heilmann (University of Kassel); Nikolai Klempp (University of Stuttgart); Kai Hufendiek (University of Stuttgart); Heike Wetzel (University of Kassel) |
| Abstract: | With an ongoing energy transition, the electric network is increasingly challenged. Handling congestion is a major responsibility of network operators. In recent years, market-based approaches to utilize network-supportive flexibility, especially local flexibility markets (LFMs), have been discussed as possible future development of congestion management processes. LFMs are a promising opportunity for the effcient, transparent and non-discriminatory integration of new flexibility options, in particular demand-side flexibility. Despite a wide body of supporting literature and several pilot implementations, there is still no common commitment to the concept of LFMs in the European Union. Here we address decision makers in the European energy economy, especially network operators, and discuss a possible flexibility product design using a methodological approach with four steps. First, we review the theoretical background of LFMs, considering both network operators' views and the possibility of demand response as a flexibility provider. Based on this review, we formulate an interim conclusion regarding requirements for flexibility product design in general. Second, using an existing framework, we propose a concrete, capacity-based, long-term flexibility product specification. Third, we discuss compliance between the defined requirements and the proposed product design to highlight the relevance of key design parameters and identify further research needs. Finally, we derive policy implications for network operators' decision makers regarding the implementation of LFMs. |
| Keywords: | demand side flexibility, local flexibility market, congestion management, flexibility product design |
| JEL: | D47 L94 Q41 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:mar:magkse:202224&r= |
| By: | Fupeng Sun; Yanwei Sun; Chiwei Yan; Li Jin |
| Abstract: | By modeling contests as all-pay auctions, we study two-stage sequential elimination contests (SEC) under incomplete information, where only the players with top efforts in the first stage can proceed to the second and final stage to compete for prizes. Players have privately held type/ability information that impacts their costs of exerting efforts. We characterize players' Perfect Bayesian Equilibrium strategies and discover a somewhat surprising result: all players exert weakly lower efforts in the final stage of the SEC compared to those under a one-round contest, regardless of the number of players admitted to the final stage. This result holds under any multi-prize reward structure, any type distribution and cost function. As a consequence, in terms of the expected highest effort or total efforts of the final stage, the optimal SEC is equivalent to a one-round contest by letting all players proceed to the final stage. |
| Date: | 2022–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2205.08104&r= |
| By: | Ritesh Jain and (Institute of Economics, Academia Sinica.); Michele Lombardi (University of Liverpool Management School, Università di Napoli Federico II, and CSEF) |
| Abstract: | Interim Rationalizable Monotonicity, due to Oury and Tercieux (2012), fully characterizes the class of social choice functions that are implementable in interim correlated rationalizable (and Bayes-Nash equilibrium) strategies. |
| Keywords: | temporary contracts, young workers, flexibility, institutional reforms, employment protection legislation. |
| JEL: | C79 D82 |
| Date: | 2022–05–11 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:645&r= |