|
on Contract Theory and Applications |
| By: | Zhuo Jin; Zuo Quan Xu; Bin Zou |
| Abstract: | We study an optimal reinsurance problem under a diffusion risk model for an insurer who aims to minimize the probability of lifetime ruin. To rule out moral hazard issues, we only consider moral-hazard-free reinsurance contracts by imposing the incentive compatibility constraint on indemnity functions. The reinsurance premium is calculated under an extended distortion premium principle, in which the distortion function is not necessarily concave. We first show that an optimal reinsurance contract always exists and then derive two sufficient and necessary conditions to characterize it. Due to the presence of the incentive compatibility constraint and the nonconcavity of the distortion, the optimal contract is obtained as a solution to a double obstacle problem. At last, we apply the general result to study three examples and obtain the optimal contract in (semi)closed form. |
| Date: | 2023–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2304.08819&r=cta |
| By: | Ian Ball; Jan Knoepfle |
| Abstract: | A principal hires an agent to work on a long-term project that culminates in a breakthrough or a breakdown. At each time, the agent privately chooses to work or shirk. Working increases the arrival rate of breakthroughs and decreases the arrival rate of breakdowns. To motivate the agent to work, the principal conducts costly inspections. She fires the agent if shirking is detected. We characterize the principal's optimal inspection policy. Periodic inspections are optimal if work primarily speeds up breakthroughs. Random inspections are optimal if work primarily delays breakdowns. Crucially, the agent's actions determine his risk-attitude over the timing of punishments. |
| Date: | 2023–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2304.01385&r=cta |
| By: | Ludvig Sinander |
| Abstract: | I revisit the standard moral-hazard model, in which an agent's preference over contracts is rooted in costly effort choice. I characterise the behavioural content of the model in terms of empirically testable axioms, and show that the model's parameters are identified. I propose general behavioural definitions of relative (over)confidence and optimism, and characterise these in terms of the parameters of the moral-hazard model. My formal results are rooted in a simple but powerful insight: that the moral-hazard model is closely related to the well-known 'variational' model of choice under uncertainty. |
| Date: | 2023–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2304.08343&r=cta |
| By: | Panova, Elena; Garrett, Daniel F. |
| Abstract: | Large-scale infrastructure investments are often carried out in set- tings where their eventual usefulness or importance is diffi cult to pre- dict. This paper studies optimal incentives for investment when the agent undertaking the investment has superior information on two dimensions: the cost of investment and the likelihood it is useful or beneficial to the principal. Usefulness eventually becomes public, but punishments are limited as the regulator aims at ensuring the agent earns non-negative profits in each period. We characterize the opti- mal incentive scheme and show it involves either: (i) investments by the agent even though he knows they are useless and rents to only cost-effi cient types, or (ii) rents to all types. The possibility that rent is left to all types contrasts with the usual prediction in static (and also dynamic) mechanism design and arises though the agent's preferences are stable over time. |
| Keywords: | Monopoly regulation; Real options; Multidimensionl asymmetric information |
| JEL: | D81 D82 L51 |
| Date: | 2023–04–26 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:128054&r=cta |
| By: | Jos Jansen (Department of Economics and Business Economics, Aarhus University) |
| Abstract: | I study the incentives of Cournot duopolists to share their technologies with their competitor in markets where intellectual property rights are absent and imitation is costless. The trade-off between a signaling effect and an expropriation effect determines the technology-sharing incentives. In equilibrium, there tends to be at most one firm that shares technologies. For similar technology distributions, there exists an equilibrium in which nobody shares. If the technology distributions are skewed towards efficient technologies, then there may exist equilibria in which one firm shares all technologies, only the best technologies, or only intermediate technologies. Further, I consider several extensions. |
| Keywords: | Cournot duopoly, strategic disclosure, indivisibility, innovation, trade secret, open source, skewed distribution |
| JEL: | D82 L13 L17 O32 O34 |
| Date: | 2023–05–03 |
| URL: | http://d.repec.org/n?u=RePEc:aah:aarhec:2023-04&r=cta |
| By: | Friedrich, Thomas |
| Abstract: | Rational net profit maximization or caring transfers according purely to need are two competing ideas seemingly excluding each other. Within the model “transfer space” I show that both strategies are necessary for an ensemble to succeed in the presence of a fixed cost. The transfer space of an ensemble consists of two parties, a source and a sink. Both parties have linear cost functions and saturating benefit functions. Both functions are dependent on the substrate concentration. In the presence of a fixed cost the net profit of a single party is negative at low and high concentrations. An ensemble striving for superadditive net profit is unable to overcome the initial phase of negative net profit within sink as sink is inactive and a forced small test transfer results in subadditivity. This strategy is unable to start in the presence of a fixed cost. The substrate transfer strategy is able to overcome the initial phase of negative net profit and subadditivity with patient transfers and enters the phase of superadditivity. This strategy fails later when the superadditivity turns into subadditivity again. This strategy is unable to stop the transfer. Successful ensembles use both strategies in sequence. Ensembles of strangers and entangled ensembles transfer substrate when the success factor is sufficient. Entanglement reduces the necessity for a high success factor. A mistaken assumption of genetic entanglement within a not entangled ensemble harms performance. No ensemble can compete successfully with less quantity and less quality than the competitor. |
| Keywords: | source; sink; ensemble; net profit; benefit factor; cost factor; superadditivity; subadditivity; transfer strategy; net profit strategy; entanglement; quality; quantity |
| JEL: | Z00 |
| Date: | 2023–04–20 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:117108&r=cta |