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on Contract Theory and Applications |
| By: | Ahmadzadeh, Amirreza |
| Abstract: | This paper examines a principal-agent model that the princi-pal mandates actions and conducts costly inspections without transfers. The principal prefers lower actions, while the agent prefers higher ac-tions and has private information about his type. The agent is protected by ex-post participation and rejects any action below his private type. The principal faces a trade-off between mandating lower actions and the risk the the agent rejects actions and chooses his outside option. We analyze various levels of the principal’s commitment ability. If the principal can commit to both inspections and actions when no inspec-tion is performed, and if the principal’s fear of ruin is greater than the agent’s, then a deterministic inspection policy is optimal. Additionally, if the principal cannot commit to either inspections or actions, the highest equilibrium payoff does not involve non-deterministic inspec-tion strategies. Finally, if the inspection cost is low and the principal commits to inspecting whenever requested by the agent, the principal can achieve the payoff of the optimal deterministic inspection policy.. |
| Keywords: | Costly state verification; mechanism design; cheap talk; inspection, limited commitment, regulation. |
| JEL: | D82 D86 M48 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:tse:wpaper:129712 |
| By: | David Landriault; Bin Li; Hong Li; Yuanyuan Zhang |
| Abstract: | This paper introduces an economic framework to assess optimal longevity risk transfers between institutions, focusing on the interactions between a buyer exposed to long-term longevity risk and a seller offering longevity protection. While most longevity risk transfers have occurred in the reinsurance sector, where global reinsurers provide long-term protections, the capital market for longevity risk transfer has struggled to gain traction, resulting in only a few short-term instruments. We investigate how differences in risk aversion between the two parties affect the equilibrium structure of longevity risk transfer contracts, contrasting `static' contracts that offer long-term protection with `dynamic' contracts that provide short-term, variable coverage. Our analysis shows that static contracts are preferred by more risk-averse buyers, while dynamic contracts are favored by more risk-averse sellers who are reluctant to commit to long-term agreements. When incorporating information asymmetry through ambiguity, we find that ambiguity can cause more risk-averse sellers to stop offering long-term contracts. With the assumption that global reinsurers, acting as sellers in the reinsurance sector and buyers in the capital market, are generally less risk-averse than other participants, our findings provide theoretical explanations for current market dynamics and suggest that short-term instruments offer valuable initial steps toward developing an efficient and active capital market for longevity risk transfer. |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2409.08914 |
| By: | Bouvard, Matthieu; Casamatta, Catherine |
| Abstract: | We study agents that provide Cash-In/Cash-Out (CICO) services to mobile money consumers. A moral hazard friction constrains these agents’ ability to hold liquid reserves, which creates an endogenous cost for operators of ensuring reliable CICO services. Interoperability that allows agents to contract with multiple operators tends to decrease the amount of liquidity held by agents when the moral hazard problem is mild through a higher utilization rate but can increase it when the moral hazard problem is severe. In the latter case, the fees paid by operators to agents become strategic complements sustaining multiple equilibria with different levels of liquidity. Fees from operators to agents tend to be inefficiently low from a welfare perspective, both because operators internalize agents’ agency rents as a cost and because they do not internalize that higher fees, by expanding agents’ capacity to hold liquidity, benefit consumers from other operators. In that context, authorizing interoperability can decrease (when moral hazard is mild) or increase (when moral hazard is severe) welfare. |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:tse:wpaper:129703 |