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on Contract Theory and Applications |
| By: | Lindset, Snorre (Trondheim Business School); Lund, Arne-Christian (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration); Persson, Svein-Arne (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration) |
| Abstract: | A new model is presented which produces credit spreads that do not converge to zero for short maturities. Our set-up includes incomplete, i.e., delayed and asymmetric information. When the financial market observes the company's earnings with a delay, the effect on both default policy and credit spreads is negligible, compared to the Leland (1994) model. When information is asymmetrically distributed between the management of the company and the financial market, short credit spreads do not converge to zero. This is result is similar to the Duffie and Lando (2001) model, although our simpler model improves some limitations in their set-up. Short interest rates from our model are used to illustrate effects similar to the dry-up in the interbank market experienced after the summer of 2007. |
| Keywords: | Credit risk; credit spreads; delayed information; asymmetric information |
| JEL: | G12 G33 |
| Date: | 2008–03–12 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:nhhfms:2008_009&r=cta |
| By: | Andrew F. Daughety (Department of Economics and Law School, Vanderbilt University); Jennifer F. Reinganum (Department of Economics and Law School, Vanderbilt University) |
| Abstract: | We develop and explore a new model of the economics of privacy. Previous work has focused on "privacy of type," wherein an agent privately knows an immutable characteristic. We consider "privacy of action," wherein privacy means that an agent's choice of action is unobservable to others. To show how a policy of privacy can be socially optimal, we assume that an agent derives utility from an action he takes, from the aggregate of all agents' actions, and from other agents' perceptions of the agent's type (that are based on his action). If his action is observable, then he distorts it (relative to his full-information optimal action) so as to enhance the perceptions that others have of him. This contributes to aggregate welfare through increasing the public good, but the disutility associated with the distortion of agents' actions is also a social cost. If his action is unobservable, then he can take his full-information optimal action and still be "pooled" with other types. When the disutility of distortion is high relative to the marginal utility of the public good, a policy of privacy is optimal. We also consider a policy of waivable privacy, and find that equilibria exist in which some, but not all, types waive privacy. More significantly, if policies of privacy or publicity are costlessly enforceable, then a policy of waivable privacy is never socially preferred. Finally, we consider a number of examples (some of which involve a public bad and/or social disapproval): open-source software development; charitable giving; recycling; consumption of health services; DNA dragnets; student rankings; constraints on information disclosure at trial; electricity and water usage during periods of voluntary rationing; shaming of speeders; and the use of earmarks by Congress. |
| Keywords: | Privacy, public goods, disclosure, signaling, esteem |
| JEL: | H41 K39 D82 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:van:wpaper:0809&r=cta |
| By: | Jens Josephson; Joel Shapiro |
| Abstract: | Interviewing in professional labor markets is a costly process for firms. Moreover, poor screening can have a persistent negative impact on firms’ bottom lines and candidates’ careers. In a simple dynamic model where firms can pay a cost to interview applicants who have private information about their own ability, potentially large inefficiencies arise from information-based unemployment, where able workers are rejected by firms because of their lack of offers in previous interviews. This effect may make the market less efficient than random matching. We show that the first best can be achieved using either a mechanism with transfers or one without transfers. |
| Keywords: | Decentralized Labor Markets, Professional Labor Markets, Asymmetric Information, Interview costs, Matching |
| JEL: | D82 J21 J44 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1093&r=cta |
| By: | Robertas Zubrickas (Stockholm School of Economics) |
| Abstract: | In the framework of static mechanism design games with non- pecuniary rewards, we solve for optimal student grading schemes and attempt to explain the observed mismatch between students? grades and their abilities. The model predicts that the more pes- simistic the teacher is about her students, the more generous she should be in grading them. Generally, the "no distortion at the top" property ceases to hold for optimal contracts with cost- less non-pecuniary rewards, and we argue that the compression of ratings as witnessed in job performance appraisals could be an equilibrium outcome. The presented theoretical ?ndings are strongly supported by empirical evidence from the related litera- ture in psychological and educational measurement. |
| Keywords: | Mechanism design, non-pecuniary incentives, op- timal grading schemes, mismatch of grades and abilities, com- pression of ratings |
| JEL: | D82 D86 I20 J41 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:iso:educat:0027&r=cta |
| By: | FARHI, Emmanuel; TIROLE, Jean |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ide:wpaper:8968&r=cta |
| By: | Josephson, Jens; Shapiro, Joel |
| Abstract: | Interviewing in professional labour markets is a costly process for firms. Moreover, poor screening can have a persistent negative impact on firms' bottom lines and candidates' careers. In a simple dynamic model where firms can pay a cost to interview applicants who have private information about their own ability, potentially large inefficiencies arise from information-based unemployment, where able workers are rejected by firms because of their lack of offers in previous interviews. This effect may make the market less efficient than random matching. We show that the first best can be achieved using either a mechanism with transfers or one without transfers. |
| Keywords: | Asymmetric Information; Decentralized Labour Markets; Interview costs; Matching; Professional Labour Markets |
| JEL: | D82 J21 J44 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6837&r=cta |
| By: | Mihara, H. Reiju |
| Abstract: | Consider the problem of allocating k identical, indivisible objects among n agents, where k is less than n. The planner's objective is to give the objects to the top k valuation agents at zero costs to the planner and the agents. Each agent knows her own valuation of the object and whether it is among the top k. Modify the (k+1)st-price sealed-bid auction by introducing a small participation fee and the option not to participate in it. This strikingly simple mechanism (modified auction) implements the desired outcome in iteratively weakly undominated strategies. Moreover, no pair of agents can profitably deviate from the equilibrium by coordinating their strategies or bribing each other. |
| Keywords: | Solomon's problem; implementation; entry fees; Olszewski's mechanism; collusion; bribes |
| JEL: | D71 D61 C72 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:8801&r=cta |
| By: | Brodaty, Thomas; Gary-Bobo, Robert J.; Prieto, Ana |
| Abstract: | We propose a new test for the presence of job-market signalling in the sense of Spence (1973), based on an equation in which log-wages are explained by two endogenous variables: the student's degree and the student's time to degree, not simply by years of education. Log-wages are regressed on a measure of education, which is a position on a scale of certificates and degrees, and a measure of the student delay, defined as the difference between the individual's school-leaving age and the average school-leaving age of students holding the same certificate or degree. We use past school-opening instruments, and distance-to-the-nearest-college, also measured in the past, when students were entering grade 6, to identify the parameters. We find a robust, significant and negative impact of the delay variable on wages, averaged over the first five years of career. A year of delay causes a 9% decrease of the student's wage. The only reasonable explanation for this effect is the fact that longer delays signal unobserved characteristics with a negative productivity value. We finally estimate a nonlinear model of education choices and cannot reject the assumption that the data is generated by a job-market signalling equilibrium. |
| Keywords: | grade repetitions; Returns to education; Signalling; time to degree; wages |
| JEL: | I2 J3 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6832&r=cta |