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on Contract Theory and Applications |
| By: | Committee, Nobel Prize (Nobel Prize Committee) |
| Abstract: | Scientific Background, The Nobel Prize in Economic Sciences 2007. Economic transactions take place in markets, within firms and under a host of other institutional arrangements. Some markets are free of government intervention while others are regulated. Within firms, some transactions are guided by market prices, some are negotiated, and yet others are dictated by management. Mechanism design theory provides a coherent framework for analyzing this great variety of institutions, or "allocation mechanisms", with a focus on the problems associated with incentives and private information. |
| Keywords: | Mechanism Design; Asymmetric Information |
| JEL: | D02 |
| Date: | 2007–10–15 |
| URL: | http://d.repec.org/n?u=RePEc:ris:nobelp:2007_002&r=cta |
| By: | Committee, Nobel Prize (Nobel Prize Committee) |
| Abstract: | Information for the Public, The Prize in Economic Sciences 2007. Buyers and sellers sometimes haggle too hard and therefore fail to trade. Desirable joint projects are sometimes not undertaken because the projects' beneficiaries fail to agree how the costs should be shared. Sickness insurance, for example, is typically criticized either for offering too little coverage or for inviting misuse. In either case, the basic problem is that people have an incentive to economize with their private information: some insurancy-policy sellers claim that their costs are high in order to increase the price; some beneficiaries of joint projects such as insurance-policy holders claim that their benefits are low in order to reduce their own contributions to the project; some well-insured workers claim that they are sick, in order to reduce their workload. |
| Keywords: | asymmetric information; mechanism design |
| JEL: | D02 |
| Date: | 2007–10–15 |
| URL: | http://d.repec.org/n?u=RePEc:ris:nobelp:2007_001&r=cta |
| By: | Dirk Bergemann (Cowles Foundation, Yale University); Stephen Morris (Dept. of Economics, Princeton University) |
| Abstract: | In a general interdependent preference environment, we characterize when two payoff types can be distinguished by their rationalizable strategic choices without any prior knowledge of their beliefs and higher order beliefs. We show that two types are strategically distinguishable if and only if they satisfy a separability condition. The separability condition for each agent essentially requires that there is not too much interdependence in preferences across agents. A social choice function -- mapping payoff type profiles to outcomes -- can be robustly virtually implemented if there exists a mechanism such that every equilibrium on every type space achieves an outcome arbitrarily close to the social choice function: this definition is equivalent to requiring virtual implementation in iterated deletion of strategies that are strictly dominated for all beliefs. The social choice function is robustly measurable if strategically indistinguishable types receive the same allocation. We show that ex post incentive compatibility and robust measurability are necessary and sufficient for robust virtual implementation. |
| Keywords: | Mechanism design, Virtual implementation, Robust implementation, Rationalizability, Ex-post incentive compatibility |
| JEL: | C79 D82 |
| Date: | 2007–06 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:1609r&r=cta |
| By: | Alberto Martin |
| Abstract: | We analyze a standard environment of adverse selection in credit markets. In our envi- ronment, entrepreneurs who are privately informed about the quality of their projects need to borrow from banks. As is generally the case in economies with adverse selection, the competitive equilibrium of our economy is shown to be ine¢ cient. Under adverse selection, the choices made by one type of agents limit what can be o¤ered to other types in an incentive-compatible manner. This gives rise to an externality, which cannot be internalized in a competitive equilibrium. We show that, in this type of environment, the ine¢ ciency associated to adverse selection is the consequence of one implicit assumption: entrepreneurs can only borrow from banks. If an additional market is added (say, a .security market.), in which entrepreneurs can obtain funds beyond those o¤ered by banks, we show that the e¢ cient allocation is an equilibrium of the economy. In such an equilibrium, all entrepreneurs borrow at a pooling rate in the security market. When they apply to bank loans, though, only entrepreneurs with good projects pledge these additional funds as collateral. This equilibrium thus simultaneously entails cross- subsidization and separation between di¤erent types of entrepreneurs. |
| Keywords: | Adverse Selection, Credit Markets, Collateral, Screening |
| JEL: | D82 G20 D62 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1085&r=cta |
| By: | Louis R. Mercorelli (School of Finance and Economics, University of Technology, Sydney); David Michayluk (School of Finance and Economics, University of Technology, Sydney); Anthony D. Hall (School of Finance and Economics, University of Technology, Sydney) |
| Keywords: | bid-ask spread models; adverse selection; anonymity |
| JEL: | G10 G15 |
| Date: | 2008–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:uts:rpaper:220&r=cta |
| By: | Maskin, Eric S. (Institute for Advanced Studies); Myerson, Roger B. (University of Chicago) |
| Abstract: | Interview with the Laureates in Economics Eric S. Maskin and Roger B. Myerson, 6 December 2007. The interviewer is Adam Smith, Editor-in-Chief of Nobelprize.org. |
| Keywords: | Mechanism Design; |
| JEL: | D02 |
| Date: | 2007–12–06 |
| URL: | http://d.repec.org/n?u=RePEc:ris:nobelp:2007_005&r=cta |
| By: | Maskin, Eric S. (Institute for Advanced Studies) |
| Abstract: | Eric S. Maskin delivered his Prize Lecture on 8 December 2007 at Aula Magna, Stockholm University. He was introduced by Professor Jorgen Weibull, Chairman of the Economics Prize Committee. |
| Keywords: | Mechanism Design; |
| JEL: | D02 |
| Date: | 2007–12–08 |
| URL: | http://d.repec.org/n?u=RePEc:ris:nobelp:2007_004&r=cta |
| By: | Schuett, Florian |
| Abstract: | A widely used clause in license contracts -- the field-of-use restriction (FOUR) -- precludes licensees from operating outside of the specified technical field. When a technology has several distinct applications, FOUR allow the licensor to slice up his rights and attribute them to the lowest-cost producer in each field of use. This can improve production efficiency. However, with complex technologies, the boundaries of fields of use may be difficult to codify, entailing a risk of overlap of licensees' rights. We explore how this affects the optimal license contract in a moral hazard framework where the licensor's effort determines the probability of overlap. We show that depending on the contracting environment, the license agreement may include output restrictions and nonlinear royalty schemes. |
| JEL: | L24 |
| Date: | 2007–07–15 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:8534&r=cta |
| By: | Giovanni Immordino (Università di Salerno and CSEF); Michele Polo (Università Bocconi, IGIER and CSEF) |
| Abstract: | We analyze the effect of errors in law enforcement on the innovative activity of firms. If successful, the innovative effort allows to take new actions that may be ex-post welfare enhancing (legal) or decreasing (illegal). Deterrence in this setting works by affecting the incentives to invest in innovation, what we call average deterrence. Type-I errors, through over-enforcement, discourage innovative effort while type-II errors (under-enforcement) spur it. The ex-ante expected welfare effect of innovations shapes the optimal policy design. Accuracy, in this setting may be undesirable, when it would influence the innovative effort in the wrong way. This result is in contrast with the traditional model, where accuracy is always welcome since it enhances marginal deterrence. When innovations are ex-ante welfare enhancing, they can be sustained by laissez-faire or, if the enforcement effort is exogenous, through better (type-I) accuracy. When instead the innovative effort is ex-ante welfare decreasing, it is discouraged through positive enforcement and (type-II) accuracy. Finally, when the enforcer can selectively reduce type-I and type-II errors, he will always concentrate accuracy on one of them only, depending on the expected impact of innovations on welfare, adopting asymmetric protocols of investigation. |
| Keywords: | norm design, innovative activity, enforcement, Type I and Type II error |
| JEL: | D73 K21 K42 L51 |
| Date: | 2008–02–20 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:196&r=cta |
| By: | Oddvar Martin Kaarboe; Luigi Siciliani |
| Abstract: | We present a model of optimal contracting between a purchaser and a provider of health services when quality has two dimensions. We assume that one dimension of quality is contractible (dimension 1) and one dimension is not contractible (dimension 2). We show that the optimal incentive scheme for the contractible dimension depends critically on the extent to which quality 1 increases or decreases the marginal cost and marginal bene?t of quality 2 (i.e. substitutability or complementarity). If the two quality dimensions are substitutes, three possible solutions arise: a) the optimal incentive scheme is high powered: the incentive is equal to the marginal bene?t of quality dimension 1 and the optimal quality in dimension 2 is zero; b) the optimal incentive scheme is low powered: both quality dimensions are positive; the incentive is below the marginal bene?t of quality dimension 1; c) it is not optimal to introduce pay for performance as the gain of welfare from an increase in quality dimension 1 is lower than the loss of welfare from an increase in quality dimension 2. If the two quality dimensions are complements the incentive scheme is always high powered: the incentive is above the marginal bene?t of dimension 1 and both quality dimensions are positive. |
| Keywords: | quality, altruism, incentives |
| JEL: | D82 I11 I18 L51 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:yor:yorken:08/06&r=cta |
| By: | Di Novi, Cinzia |
| Abstract: | We use the 2003/2004 Medical Expenditure Panel Survey in conjunctions with the 2002 National Health Interview Survey to test for adverse selection in the U.S. private health insurance market. The key idea is to test whether the individuals who are more exposed to health risks also buy insurance contracts with more coverage or higher expected payments. The critical statistical problem is that the extension of insurance is only measured for those who are insured and face positive health care expenditure. So there is a possible sample selection bias effect. The procedure used is based on a method suggested by Wooldridge (1995). The method also accounts for heterogeneity across individuals. The simultaneous account taken of both possible sources of bias is new for this kind of application. |
| Keywords: | adverse selection, health insurance, risk profile |
| JEL: | I11 I18 D82 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:uca:ucapdv:103&r=cta |
| By: | Myerson, Roger B. (University of Chicago) |
| Abstract: | Roger B. Myerson delivered his Prize Lecture on 8 December 2007 at Aula Magna, Stockholm University. He was introduced by Professor Jorgen Weibull, Chairman of the Economics Prize Committee. |
| Keywords: | Mechanism Design; |
| JEL: | D02 |
| Date: | 2007–12–08 |
| URL: | http://d.repec.org/n?u=RePEc:ris:nobelp:2007_006&r=cta |