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on Contract Theory and Applications |
| By: | Masazumi Hattori (Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: masazumi.hattori @boj.or.jp)); Kazuhiko Ohashi (Professor, Hitotsubashi University (E-mail: kohashi@ics.hit-u.jp)) |
| Abstract: | We consider an economy in which a lender finances his loans to borrowers by issuing a securitized product to investors, and where the credit quality of the product may depend on whether the lender screens the borrowers. In the presence of asymmetric information between the lender and the investors about the credit quality of potential borrowers, overvaluation of the low-quality securitized product may occur, inducing lender to not screen the borrowers and hence to issue a securitized product of low credit quality. This is likely to occur when the investors finds it difficult to distinguish the good state from the bad state, or when the seed of recession creeps toward the booming economy. A retention regulation that requires the lender to hold a minimum ratio of his own securitized products is not necessarily effective in solving this incentive problem. Even worse, in a certain situation, the retention regulation discourages the lender's screening effort and reduces welfare. |
| Keywords: | originate-to-distribute, securitization, asymmetric information, financial regulation, screening, verification, retention |
| JEL: | G14 G21 G24 |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:11-e-17&r=cta |
| By: | Philipp Weinschenk (Max Planck Institute for Research on Collective Goods, Bonn) |
| Abstract: | We study a dynamic model of team production with moral hazard. We show that the players begin to invest effort only shortly before the time limit when the reward for solving the task is shared equally. We explore how the team can design contracts to mitigate this form of procrastination and show that the second-best optimal contract is discriminatory. We investigate how limited liability or the threat of sabotage influences the team’s problem. It is further shown that players who earn higher wages can be worse off than teammates with lower wages and that present-biased preferences can mitigate procrastination. |
| Keywords: | Moral Hazard, team production, partnerships, procrastination, contract design, discrimination |
| JEL: | D82 M52 L22 J71 |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:mpg:wpaper:2011_13&r=cta |
| By: | Han, Seungjin |
| Abstract: | This paper studies non-committed procurement in which (i) it is not economically viable for a buyer (e.g. government) to commit herself to scoring rules due to the complex nature of the good and (ii) asymmetric sellers have affiliated signals on production costs with interdependent values. In non-committed procurement, a buyer advertises open invitations to potential sellers without committing to scoring rules, sellers submit menus of alternative contracts, and finally the buyer selects a winning seller by choosing a contract from the winning seller's menu. This paper establishes the existence of a continuum of monotone equilibria. Monotone equilibrium is bounded above by joint ex-post efficiency and below by joint interim efficiency. Among multiple equilibria, the jointly ex-post efficient equilibrium is theoretically appealing because it is jointly renegotiation-proof. In practice, the buyer would acquire sellers' signals on production costs in equilibrium by reviewing and evaluating sellers' proposals. For the jointly ex-post efficient procurement in practice without the buyer's commitment, it is important that the buyer, as an information collector on production costs, establishes reputation that her information on production costs is revealed during the negotiation with the winning seller. |
| Keywords: | non-committed procurement, interdependent values, monotone equilibria |
| JEL: | C72 D44 D82 |
| Date: | 2011–05–25 |
| URL: | http://d.repec.org/n?u=RePEc:ubc:pmicro:seungjin_han-2011-9&r=cta |
| By: | Felix Höffler (Max Planck Institute for Research on Collective Goods, Bonn); Sebastian Kranz (University of Bonn, Department of Economics) |
| Abstract: | A fully unbundled, regulated network fi?rm of unknown efficiency level can undertake unobservable effort to increase the likelihood of low downstream prices, e.g., by facilitating downstream competition. To incentivize such effort, the regulator can use an incentive scheme paying transfers to the ?firm contingent on realized downstream prices. Alternatively, the regulator can propose to the ?firm to sell the following forward contracts: the fi?rm pays the downstream price to the owners of a contract, but receives the expected value of the contracts when selling them to a competitive fi?nancial market. We compare the two regulatory tools with respect to regulatory capture: if the regulator can be bribed to suppress information on the underlying state of the world (the basic probability of high downstream prices, or the type of the firm), optimal regulation uses forward contracts only. |
| Keywords: | Incentive regulation, regulatory capture, virtual power plants |
| JEL: | K23 L94 L43 L51 |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:mpg:wpaper:2011_09&r=cta |
| By: | Omer Biran (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - CNRS : UMR7534 - Université Paris Dauphine - Paris IX) |
| Abstract: | We consider a second price auction between bidders with independently and identically distributed valuations, where a losing bidder suffers a negative direct externality. Considering ex-ante commitments to form bidding rings we study the question of core stability of the grand coalition, namely: is there a subset of bidders that prefers forming a small bidding ring rather than participating in the grand cartel? We show that in the presence of direct externalities between bidders the grand coalition is not necessarily core stable, as opposed to the zero externality case, where the stability of the grand coalition is a known result. Finally, we study collusion in auctions as a mechanism design problem, insisting on the difficulty to compare ex-ante and interim commitments. In particular, we show that there are situations in which bidders prefer colluding before privately learning their types. |
| Keywords: | Auctions;collusion;externalities;Bayesian games;core; partition function game;mechanism design |
| Date: | 2011–07–11 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00608008&r=cta |
| By: | Han, Seungjin |
| Abstract: | In common agency problems, competing principals often incentivize a privately-informed agent's action choice by offering incentive functions that specify the principal's action as a function of the part of the agent's action that is contractible. This paper shows that when the agent's preference relation is strictly monotone in each principal's action, the set of all equilibrium allocations relative to incentive functions is identical to the set of all equilibrium allocations relative to any complex mechanisms. |
| Keywords: | incentive functions, competing mechanisms, taxation principle, common agency |
| Date: | 2011–05–26 |
| URL: | http://d.repec.org/n?u=RePEc:ubc:pmicro:seungjin_han-2011-11&r=cta |
| By: | Han, Seungjin |
| Abstract: | This paper studies how implicit collusion may take place in non-exclusive contracting under adverse selection when multiple agents (e.g., entrepreneurs with risky projects) non-exclusively trade with multiple firms (e.g., banks). It introduces the notion of the dual-additive price schedule, which makes agents non-exclusively trade with firms in the market without arbitrage opportunities. It then shows that any dual-additive price schedule can be supported as equilibrium terms of trade in the market if each firm's expected profit is no less than its reservation profit. Firms sustain collusive outcomes through triggering trading mechanisms in which they change their terms of trade contingent only on agents' reports on the lowest average price that the deviating firm's trading mechanism would induce. |
| Keywords: | collusion, non-exclusive contracting, competing mechanisms |
| JEL: | D43 D82 D86 |
| Date: | 2011–05–26 |
| URL: | http://d.repec.org/n?u=RePEc:ubc:pmicro:seungjin_han-2011-10&r=cta |
| By: | Gian Luigi Albano (yItalian Public Procurement Agency (Consip S.p.A); Berardino Cesi (Faculty of Economics, University of Rome "Tor Vergata" and University of Bristol); Alberto Iozzi (Faculty of Economics, University of Rome "Tor Vergata") |
| Abstract: | We show how repeatedly awarded procurement contracts where unverifiable quality dimensions are relevant can be reinterpreted as relational contracts between a buyer and a contractor that is threatened by a potentially less efficient competitor. We compare two scenarios: 1) Under freedom of choices the (public) buyer freely chooses the contractor, the price and the (unverifiable) quality it should stick to, 2) in a competitive discretionary tendering the buyer evaluates differently the bids of the suppliers by means of a handicap, based on the firm's past performance. We show that, if firms' costs are common knowledge, relational discriminatory tenderings replicates the results of long term contracting (freedom of choice). The handicap ensures the existence of a relational contract under which the buyer selects the more efficient firm and pays it a price higher than its cost, and the firm delivers the required quality. This outcome is an equilibrium when thecost of quality is not too high, and the players' discount factor and the valuation of quality are not small. A self-enforcing relational contract entails an handicap which is closer to the difference between the firms' specific-cost, the lower is the variable cost of quality and the higher is the players' discount factor. |
| Keywords: | public procurement, relational contracts, unverifiable quality, handicap. |
| Date: | 2011–07–21 |
| URL: | http://d.repec.org/n?u=RePEc:rtv:ceisrp:209&r=cta |
| By: | Grassi, Emanuele; Di Cintio, Marco |
| Abstract: | We propose a modified version of the Shapiro-Stiglitz’s (1984) efficiency wage model by introducing temporary contracts in the standard setup. New theoretical insights emerge on the incentive problem faced by workers and firms. We argue that the existence of temporary contracts broaden the incentive menu available to employers and that the optimal incentive structure can be sustained as an equi- librium outcome only if permanent contracts do not disappear. We also provide an alternative explanation of the wage penalty suffered by temporary workers even if standard models of efficiency wages would predict higher compensations for workers facing a higher job loss risk. |
| Keywords: | Dual labour market; efficiency wages; wage differentials |
| JEL: | J41 J31 J63 |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:32266&r=cta |
| By: | Nenad Kos |
| Abstract: | We examine a model of limited communication in which the seller is selling a single good to two potential buyers. Limited communication is modeled as follows: in each of the finite number of periods the seller asks one of the two buyers a binary question. After the final answer, the allocation and the transfers are executed. The model sheds light on the communication protocols that arise in welfare maximizing mechanisms. Among other things, we show that when the total number of questions is bounded the welfare optimal mechanism requires the seller to start with questioning one of the buyers and conclude with a single last question to the other buyer. |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:igi:igierp:405&r=cta |
| By: | Aida Tavares (Departamento de Economia e Gestão Industrial, GOVCOPP, Universidade de Aveiro); Pedro Pita Barros (Economics Faculty of Universidade Nova de Lisboa - Portugal, and CEPR (London)) |
| Abstract: | This paper provides evidence on ex-ante moral hazard in Portugal. The issue is addressed in a setting where people buy voluntary private health insurance, on top of existing Government coverage. We identify the main factors that lead people to adopt healthy lifestyles, such as taking up sports and not smoking, which are associated with primary prevention. Moreover, it allows for an inference of the role of risk aversion of individuals in these decisions. We use a GHK recursive simulator of multivariate probit for insurance demand, smoking and sporting decisions, to provide joint estimates taking into consideration potential endogeneity of these decisions. Our results indicate that there is some evidence of ex-ante moral hazard with respect to primary prevention behaviors. Di¤erences in risk aversion across individuals do not seem to play a primary role in explaining distinct life styles. |
| Keywords: | ex-ante moral hazard, prevention, lifestyles |
| JEL: | I10 D82 D12 |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:ave:wpaper:562011&r=cta |
| By: | Goetghebuer, Tatiana |
| Abstract: | In Mali, there exist various farm-cum-family structures, so that agricultural production occurs on plots controlled by different members of the household. In this paper, we want to lay emphasis on the under-researched differentials between collective and individual plots (attended by male or female farmer) in the context of extended family farms using input and output first hand data collected in the south-eastern part of Mali. First, we find that land yields are significantly larger on (male) private plots than on common plots with similar characteristics planted to the same crop in the same year after all appropriate controls have been included. And, second, we bring strong suggestive evidence that a moral hazard-in-team problem exists on the collective fields (yet only with regard to care-intensive crops) that could explain their relatively poor performance. -- |
| Keywords: | Land productivity,family structure,moral-hazard-in-team problem,collective |
| JEL: | D13 D57 J12 O12 O13 Q12 Q15 R20 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:gdec11:34&r=cta |
| By: | Anne Bucher; Sebastien Menard |
| Date: | 2010–12–21 |
| URL: | http://d.repec.org/n?u=RePEc:tep:teppwp:wp1021&r=cta |