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on Contract Theory and Applications |
| By: | Meg Sato (School of Economics, Finance and Marketing, Royal Melbourne Institute of Technology University) |
| Abstract: | 　　 It is well known that granting incentive pay, such as stock-based compensation, to an agent mitigates the agency problem created by the unobservability of the agent’s e¤ort level. Using contract theory, this paper shows that stock options mitigate the moral hazard problem. However, they create another problem, namely, a misalignment of the interest between the principal and the …rm. Speci…cally, I consider an environment in which the principal can save her payments to the incumbent agent where the rational choice of the principal on whether to replace or retain the incumbent agent becomes an ine¢ cient decision from the perspective of total …rm value. The paper further examines both long- and short-term vested options may exhibit over-replacement of the incumbent agent, but only the short-term vested options may exhibit under-replacement, along the parametric range of control bene…t. |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:tky:fseres:2013cf890&r=cta |
| By: | Jullien, Bruno; Pouyet, Jérôme; Sand-Zantman, Wilfried |
| Abstract: | An economic agent may engage into an early negotiation with the sole pur- pose of gathering information to improve his bargaining position. We analyze this issue in the context of a buyer/seller relationship, where the seller has private information on the future gains from trade, and the buyer can bypass at some preliminary stage. While both players can wait until uncertainty is resolved and trade eciently ex-post, we show that the buyer may be better off by proposing an early contract. This early contract uses the sellers' pri- vate information to divide types in a way that makes costly bypass a credible threat. While some types of seller accept the contract because they gain more than in the status quo situation, other types only accept for fear that rejection would reveal too much information. We derive the whole set of equilibrium payoffs of this game, and study extensions to fit various economic situations. |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:27396&r=cta |
| By: | Cordero Salas, Paula; Roe, Brian; Sohngen, Brent |
| Abstract: | The success of reducing carbon emissions from deforestation and forest degradation depends on the design of an effective financial mechanism that provides landholders sufficient incentives to participate and provide additional and permanent carbon offsets. This paper proposes self-enforcing contracts as a potential solution for the constraints in formal contract enforcement derived from the stylized facts of reducing emissions from deforestation and forest degradation implementation in developing countries. It characterizes the optimal self-enforcing contract and provides the parameters under which private enforcement is sustainable when the seller type that is, the opportunity cost of the land, is private information. The optimal contract suggests that the seller with low opportunity cost receives a positive enforceable payment equivalent to the information rents required for self-selection, in contrast to when the buyer knows the seller type in which case all payments should be made contingent on additional forest conservation. When the buyer does not know the seller type, a first-best self-enforcing contract can be implemented if forest conservation is sufficiently productive. If the gains from forest conservation are small, self-enforcing contracts may induce some carbon sequestration by some or all seller types, depending on the value of the shared gains of the relationship. |
| Keywords: | Climate Change Mitigation and Green House Gases,Contract Law,Debt Markets,Common Property Resource Development,Forestry |
| Date: | 2013–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:6502&r=cta |
| By: | V.V. Chari; Patrick J. Kehoe |
| Abstract: | We develop a model in which, in order to provide managerial incentives, it is optimal to have costly bankruptcy. If benevolent governments can commit to their policies, it is optimal not to interfere with private contracts. Such policies are time inconsistent in the sense that, without commitment, governments have incentives to bail out firms by buying up the debt of distressed firms and renegotiating their contracts with managers. From an ex ante perspective, however, such bailouts are costly because they worsen incentives and thereby reduce welfare. We show that regulation in the form of limits on the debt-to-value ratio of firms mitigates the time-inconsistency problem by eliminating the incentives of governments to undertake bailouts. In terms of the cyclical properties of regulation, we show that regulation should be tightest in aggregate states in which resources lost to bankruptcy in the equilibrium without a government are largest. |
| JEL: | E0 E44 E6 E61 |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19192&r=cta |
| By: | Maria Gabriella Graziano (Università di Napoli Federico II and CSEF); Claudia Meo (Università di Napoli Federico II); Nicholas C. Yannelis (University of Iowa and University of Manchester) |
| Abstract: | An exchange economy with asymmetrically informed agents is considered with an exogenous rule that regulates the information sharing among agents. For it, the notion of stable sets à la Von Neumann and Morgenstern is analyzed. Two different frameworks are taken into account as regards preferences: a model without expectations and a model with expected utility. For the first one, it is shown that the set $V$ of all individually rational, Pareto optimal, symmetric allocations is the unique stable set of symmetric allocations. For the second one, an example is presented which shows that the same set $V$ is not externally stable and a weaker result is proved. Finally, the coalitional incentive compatibility of allocations belonging to the unique stable set is provided. |
| Keywords: | sets, asymmetric information, information sharing |
| JEL: | C71 D51 D82 |
| Date: | 2013–06–25 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:333&r=cta |
| By: | Dessi, Roberta (IDEI, Toulouse School of Economics); Miquel-Florensa, Pepita (Toulouse School of Economics) |
| Abstract: | We study the role of status in an experimental Principal-Agent game.Status is awarded to subjects based on either talent or luck. In each randomly matched principal-agent pair, the principal chooses the agent's status-contingent piece rate for a task in which talent matters for performance (an IQ test). We perform the experiment in Cambridge (UK) and in HCMV (Vietnam). We find that in Cambridge piece rate others are significantly higher for high-status agents (only) when status signals talent. However, these higher offers are not payoff-maximizing for the principals.In contrast, Vietnam piece rate offers are significantly higher for high-status agents (only) when status is determined by luck. We explore possible explanations, and the implications for status and incentives. |
| Keywords: | , , incentives, status, identity, piece rate, principal-agent, signaling, culture. |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:27275&r=cta |
| By: | Aleksander Berentsen; Michael McBride; Guillaume Rocheteau |
| Abstract: | The goal of this paper is to study how informational frictions affect asset liquidity in OTC markets in a laboratory setting. The experiments replicate an OTC market similar to the one used in monetary and financial economics (Shi, 1995; Trejos and Wright, 1995; Duffie, Garleanu, and Pedersen, 2005): individuals are matched bilaterally and at random, there are gains from trades due to differences in technologies and endowments, and the terms of trade are determined through a simple bargaining protocol. Subjects buy commodities that have different private values with assets that have common values and can be subject to a private information problem. The asset plays the role of a medium of exchange, but this role can be affected by its lack of "recognizability." We study a benchmark experiment where the OTC bargaining game takes place under complete information, a set of experiments with adverse selection where the terminal value of notes are determined exogenously, and a set of experiments with hidden actions where subjects can produce fraudulent notes at some cost. |
| Keywords: | Liquidity, money, information, experiments |
| JEL: | G12 G14 E42 D82 D83 |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:zur:econwp:126&r=cta |
| By: | Damien S.Eldridge (School Economics, La Trobe University; University of South Australia; Independent Researcher; SSenior Economist, Cornerstone Research, USA) |
| Abstract: | We use the 2004-'05 wave of the Australian National Health Survey to estimate the impact of private hospital insurance on the propensity for hospitalization as a private patient. We employ instrumental-variable methods to account for the endogeneity of supplementary private hospital insurance purchases. We calculate moral hazard based on a dierence-of-means estimator. We decompose the moral hazard estimate into a diversion component that is due to an insurance-induced substitution away from public patient care towards private patient care, and an expansion component that measures a pure insurance-induced increase in the propensity to seek private patient care. We nd some evidence of self-selection into insurance but this nding is not robust to alternative specications. Our results suggest that on average, private hospital insurance causes a sizable and signicant increase in the likelihood of hospital admission as a private patient. However, there is little evidence of moral hazard; the treatment eect of private hospital insurance on private patient care is driven almost entirely by the substitution away from public patient care towards private patient care. |
| Keywords: | Health Insurance, Health Care Consumption, Moral Hazard |
| JEL: | I11 I18 C35 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:trb:wpaper:2013.03&r=cta |
| By: | Annamaria Conti; Jerry Thursby; Marie C. Thursby |
| Abstract: | We examine the role of patents as signals used to reduce information asymmetries in entrepreneurial finance. A theoretical model gives conditions for a unique separating equilibrium in which startup founders file for patents to signal invention quality to investors, as well as appropriating value. The theory allows for heterogeneous investors and examine the optimal match of different types of startups, as defined by the quality of their technology, to investors who differ in the amount of non financial capital they provide. The empirical analysis is consistent with the model's predictions using a novel dataset of Israeli startups that received external funding during the period 1994-2011. |
| JEL: | G14 O16 O3 O34 |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19191&r=cta |