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on Contract Theory and Applications |
| By: | Mehmet Ekmekci; Lucas Maestri; Dong Wei |
| Abstract: | We study a dynamic contracting problem with multiple agents and a lack of commitment. A principal who can only commit to one-period contracts wants to screen efficient agents over time. Once an agent reveals his type, the principal becomes tempted to revise contract terms, causing a "ratchet effect." Alterations of contracts are observable and, hence, whenever past promises are not honored future information revelation stops. We provide a necessary and sufficient condition under which the principal is able to foster information revelation. When players are sufficiently patient, the agents' private information is either never revealed or fully revealed in a sequential manner. Optimal contracts entail high-powered incentives after an agent's type is initially disclosed, and rewards for information revelation disappear in the long run. |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2405.04468&r= |
| By: | Giuseppe Dari-Mattiacci (University of Amsterdam); Sander Onderstal (University of Amsterdam); Francesco Parisi (University of Minnesota); Ram Singh (Department of Economics, Delhi School of Economics) |
| Abstract: | It is well known that sellers have a general obligation to disclose “negative” information about hidden defects of their products. In contrast, buyers usually do not have a binding obligation to disclose “positive” information about the hidden qualities of the products. The leading explanation for the asymmetric treatment of the two sides - buyers and sellers - is provided by appealing to incentives to invest in relevant information. It is argued that the imposition of disclosure duties on buyers would undermine their incentives to acquire socially useful but costly information ex-ante. This explanation is unsatisfactory. First, the failure to correct asymmetric information problems ex-post would cause, as we will show, an inverse adverse selection problem ex-ante. This would lead to the uninformed sellers’withdrawal from the market. Consequently, resources would not move to (informed)buyers with higher valuations. In this paper, we develop a model to balance the benefits of information acquisition, on the one hand, with the costs of asymmetric information, on the other hand. We use the framework to study the incentives created by different defaultdisclosure and non-disclosure - rules. We examine the optimum default rules by showing that the choice of alternative disclosure rules makes a difference when parties can contract around defaults at a moderate cost. Unlike disclosure rules, non-disclosure default rules yield partially separating equilibria that preserve the buyers’ incentives to acquire information and foster trade opportunities between expert and uninformed sellers. JEL Code: D44, D82, D86, K12 |
| Keywords: | asymmetric information, penalty default rules, inverse adverse selection |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:cde:cdewps:346&r= |
| By: | Qianjun Lyu |
| Abstract: | This paper studies the optimal refund mechanism when an uninformed buyer can privately acquire information about his valuation of a product over time. We consider a class of refund mechanisms based on stochastic return policies: if the buyer requests a return, the seller will issue a (partial) refund while allowing the buyer to keep the product with some probability. Such return policies can affect the buyer's learning process and thereby influence the return rate. Nevertheless, we show that the optimal refund mechanism is deterministic and takes a simple form: either the seller offers a sufficiently low price and disallows returns to deter buyer learning, or she offers a sufficiently high price with free returns to implement maximal buyer learning. The form of the optimal refund mechanism is non-monotone in the buyer's prior belief regarding his valuation. |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2404.14927&r= |
| By: | Bastien Baldacci; Philippe Bergault; Olivier Gu\'eant |
| Abstract: | This paper introduces a novel methodology for the pricing and management of share buyback contracts, overcoming the limitations of traditional optimal control methods, which frequently encounter difficulties with high-dimensional state spaces and the intricacies of selecting appropriate risk penalty or risk aversion parameter. Our methodology applies optimized heuristic strategies to maximize the contract's value. The computation of this value utilizes classical methods typically used for pricing path-dependent Bermudan options. Additionally, our approach naturally leads to the formulation of a hedging strategy. |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2404.13754&r= |