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on Microeconomics |
| By: | Juan I Block; Drew Fudenberg; David K Levine |
| Date: | 2016–06–30 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levarc:786969000000001375&r=mic |
| By: | Christina Bannier; Eberhard Feess; Natalie Packham; Markus Walzl |
| Abstract: | This paper examines the effect of imperfect labor market competition on the efficiency of compensation schemes in a setting with moral hazard and risk-averse agents, who have private information on their productivity. Two vertically differentiated firms compete for agents by offering contracts with fixed and variable payments. The superior firm employs both agent types in equilibrium, but the competitive pressure exerted by the inferior firm has a strong impact on contract design: For high degrees of vertical differentiation, i.e. low competition, low-ability agents are under-incentivized and exert too little effort. For high degrees of competition, high-ability agents are over-incentivized and bear too much risk. For a range of intermediate degrees of competition, however, agents' private information has no impact and both contracts are second-best. Interim efficiency of the least-cost separating allocation in the inferior firm is a sufficient condition for equilibrium existence. If this is violated, there can only be equilibria where the inferior firm ''overbids'', i.e. where it would not break even when attracting both agent types. Adding horizontal differentiation allows for pure-strategy equilibria even when there would be no equilibrium without overbidding in the pure vertical model, but equilibria with overbidding fail to exist. |
| Keywords: | Incentive compensation, screening, imperfect labor market competition, vertical differentiation, horizontal differentiation, risk aversion |
| JEL: | D82 D86 J31 J33 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:inn:wpaper:2016-20&r=mic |
| By: | R. Vijay Krishna (Duke University); Shiming Fu (University of Rochester) |
| Abstract: | This paper studies a dynamic agency model in which the agent privately observes the firm's cash flows that are subject to persistent shocks. We characterize the optimal contract by continuation utilities contingent on the agent's report today and tomorrow. The optimal contract can be implemented by a contingent credit line, stock options, and equity. In contrast to the iid case, we find: (i) investment is possibly efficient in the constrained firm, and is varying with cash flow in the unconstrained firm; (ii) the firm possibly experiences longer time of being financially constrained; (iii) the agent receives cash payment less than what he can divert from cash flow and investors hold more equity stake; (iv) compensation to the agent is via stock options and equity, the combination of which depends on persistence level; (v) firm credit line limits are contingent on compliance with a cash flow covenant and are history dependent. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:89&r=mic |
| By: | Albina Danilova |
| Abstract: | This paper studies the equilibrium pricing of asset shares in the presence of dynamic private information. The market consists of a risk-neutral informed agent who observes the firm value, noise traders, and competitive market makers who set share prices using the total order flow as a noisy signal of the insider's information. I provide a characterization of all optimal strategies, and prove existence of both Markovian and non Markovian equilibria by deriving closed form solutions for the optimal order process of the informed trader and the optimal pricing rule of the market maker. The consideration of non Markovian equilibrium is relevant since the market maker might decide to re-weight past information after receiving a new signal. Also, I show that a) there is a unique Markovian equilibrium price process which allows the insider to trade undetected, and that b) the presence of an insider increases the market informational efficiency, in particular for times close to dividend payment. |
| Date: | 2016–06 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1607.00035&r=mic |
| By: | Piggins, Ashley; Duddy, Conal |
| Abstract: | The assumption that the social preference relation is complete is demanding. We distinguish between “hard” and “soft” incompleteness, and explore the social choice implications of the latter. Under soft incompleteness, social preferences can take values in the unit interval. We motivate interest in soft incompleteness by presenting a version of the strong Pareto rule that is suited to the context of a [0, 1]-valued social preference relation. Using a novel approach to the quasi-transitivity of this relation we prove a general oligarchy theorem. Our framework allows us to make a distinction between a “strong” and a “weak” oligarchy, and our theorem identifies when the oligarchy must be strong and when it can be weak. Weak oligarchy need not be undesirable. |
| Keywords: | Oligarchy; Gibbard’s theorem; Incompleteness; Max-star transitivity |
| JEL: | D71 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:72392&r=mic |
| By: | Yuki Shigeta |
| Abstract: | We study dynamic mean-variance optimization problems with multiple priors. We introduce two types of multiple priors, the priors for expected returns and the priors for covariances. Our framework suggests that the global minimumvariance portfolio is optimal when the investor strongly doubts the correctness of the estimated expected returns, and the equally weighted portfolio is optimal when the investor strongly doubts the correctness of the estimated covariances. From the back tests, we find that for some data sets, the strategy that invests in the global minimum-variance portfolio or the equally weighted portfolio considering the market condition is more efficient than the other mean-variance efficient portfolios. |
| Keywords: | Robust mean-variance optimization; dynamic portfolio selections; naive diversification; global minimum-variance portfolio; mean-variance efficiency. |
| JEL: | G11 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:kue:epaper:e-16-004&r=mic |
| By: | Ennio Bilancini; Leonardo Boncinelli (Dipartimento di Scienze per l'Economia e l'Impresa) |
| Abstract: | In this paper we study the long run convention emerging from stag-hunt interactions when errors converge to zero at a rate that is positively related to the payoff earned in the previous period. We refer to such errors as condition-dependent mistakes. We find that, if interactions are sufficiently stable over time, then the payoff-dominant convention emerges in the long run. Moreover, if interactions are neither too stable nor too volatile, then the risk-dominant convention is selected in the long run. Finally, if interactions are quite volatile, then the maximin convention emerges even if it is not risk-dominant. We introduce the notion of \emph{condition-adjusted-risk-dominance} to characterize the convention emerging in the long run under condition-dependent mistakes. We contrast these results with the results obtained under alternative error models: uniform mistakes, i.e., errors converge to zero at a rate that is constant over states, and payoff-dependent mistakes, i.e., errors converge to zero at a rate that depends on expected losses. |
| Keywords: | risk-dominant; payoff-dominant; maximin; mistakes; stag hunt; stochastic stability. |
| JEL: | C72 C73 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:frz:wpaper:wp2016_11.rdf&r=mic |
| By: | Anton Tsoy (EIEF) |
| Abstract: | This paper develops a dynamic equilibrium model of decentralized asset markets with both search delays and endogenous bargaining delays arising in the limit of almost public information about the asset quality. The model has several implications for liquidity and prices. First, conditional on the public information, the liquidity is U-shaped in the quality and assets in the middle of the quality range may not be traded at all. Second, search and bargaining frictions have opposite effects on the market liquidity showing that transparency, while welfare improving, may also hurt the market liquidity. Third, the substitutability of different asset classes leads to flights-to-liquidity during periods of market uncertainty and reveals adverse effects of gradual transparency policies. Finally, the paper derives the effect of asset liquidity, market liquidity and market tightness on asset prices. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:8&r=mic |
| By: | Dmitry Levando |
| Abstract: | The paper suggests a non-cooperative simultaneous game, with a number of potential deviators is a parameter of the game. A definition of the game embeds mechanism design. The game has an equilibrium in mixed strategies. The equilibrium encompasses intra and inter group externalities and individual payoffs that make it different from a strong Nash, coalition-proof equilibrium and some other equilibrium concepts. We offer a non-cooperative stability criterion to describe a robustness of an equilibrium strategy profile to an increase in a number of deviators. The criterium may serve as a way to measure trust for the equilibrium in terms of a number of potential deviators. |
| Keywords: | Non-cooperative games |
| JEL: | C72 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:ven:wpaper:2016:15&r=mic |
| By: | Aghadadashli, Hamid; Dertwinkel-Kalt, Markus; Wey, Christian |
| Abstract: | We re-examine the Nash bargaining solution when an upstream and a downstream firm bargain over a linear input price. We show that the profit sharing rule is given by a simple and instructive formula which depends on the parties' disagreement payoffs, the profit weights in the Nash-product and the elasticity of derived demand. A downstream firm's profit share increases in the equilibrium derived demand elasticity which in turn depends on the final goods' demand elasticity. Our simple formula generalizes to bargaining with N downstream firms when bilateral contracts are unobservable. |
| Keywords: | Nash Bargaining,Demand Elasticity |
| JEL: | L13 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:dicedp:224&r=mic |
| By: | Martin Geiger; Richard Hule |
| Abstract: | We study the potential role of correlated refinancing abilities among different countries for the disruption of government bond markets in a currency union. Following Morris and Shin (2004) we use a global games framework and model the simultaneous investment decision into two assets, which are subject to correlated fundamental states, as a coordination problem with correlated imperfect information. Based on this model we evaluate the role of information about one country for the coordination of creditors of another country. We find, however, that the contagious effects on the price of debt precipitated through correlation are modest. Hence, assuming that investors behave as modeled in the global game, we conclude that correlated fundamentals that precipitate informational spillovers appear to be unlikely to play a major role for e.g. the disruption of some Eurozone government bond markets in the aftermath of the recent financial and economic crisis. |
| Keywords: | Government bond refinancing, global games, creditor coordination, currency union |
| JEL: | D82 G12 |
| Date: | 2016–06 |
| URL: | http://d.repec.org/n?u=RePEc:inn:wpaper:2016-19&r=mic |
| By: | Adriaan R. Soetevent (University of Groningen, The Netherlands); Tadas Bruzikas (University of Groningen, The Netherlands) |
| Abstract: | Do the choices of consumers who search for a product's best price exhibit risk neutral, risk averse or loss averse risk attitudes? We study how in a problem of sequential search with costless recall the relation between a consumer's willingness to pay for continued search and the level of price uncertainty depends on her risk preferences. Independent of the current best price, an increase in price uncertainty encourages continued search when consumers are risk neutral. However, we prove that theory predicts an inversion when consumers are either risk or loss averse. In those cases, an increase in price uncertainty only increases the consumer's willingness to pay (WTP) for continued search if the current best price is sufficiently low. We subsequently use this observation in an empirical test to identify between different risk preferences in a stylized problem of sequential search. In line with the inversion, we find that a reduction in price uncertainty decreases the WTP for continued search when the current best price is low but increases the WTP when it is high. While at odds with the assumption of risk neutrality, this finding is consistent with models of consumer risk and/or loss aversion. Moreover, the model parameters of risk and loss aversion that lead to the best empirical fit have values similar to those estimated for other decision domains. |
| Keywords: | consumer search; risk aversion; loss aversion; price uncertainty |
| JEL: | D11 D12 D83 M31 |
| Date: | 2016–07–04 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20160049&r=mic |