|
on Contract Theory and Applications |
|
Issue of 2008‒09‒13
fifteen papers chosen by Simona Fabrizi Massey University Department of Commerce |
| By: | Vasiliki Skreta |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:ste:nystbu:08-10&r=cta |
| By: | Wagman, Liad; Conitzer, Vincent |
| Abstract: | We study the following game: each agent i chooses a lottery over nonnegative numbers whose expectation is equal to his budget b_i. The agent with the highest realized outcome wins and agents only care about winning). This game is motivated by various real-world settings where agents each choose a gamble and the primary goal is to come out ahead. Such settings include patent races, stock market competitions, and R&D tournaments. We show that there is a unique symmetric equilibrium when budgets are equal. We proceed to study and solve extensions, including settings where agents must obtain a minimum outcome to win; where agents choose their budgets (at a cost); and where budgets are private information. |
| Keywords: | Strategic gambling; Nash equilibrium; fair lotteries |
| JEL: | D81 L20 C70 C72 |
| Date: | 2008–08–14 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:10375&r=cta |
| By: | Debashis Pal; Arup Bose; David Sappington |
| Abstract: | We investigate when identical agents will be treated asymmetrically in a simple team setting. Asymmetric treatment is optimal when the agents individual contributions to team performance are complements. Symmetric treatment of identical agents is optimal when the agents contributions are substitutes or when they are independent. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:cin:ucecwp:2008-08&r=cta |
| By: | Debashis Pal; Arup Bose; David Sappington |
| Abstract: | We examine the effects of a systematic increase in the agents operating costs in a standard agency setting with moral hazard. We identify conditions under which the agent benefits from the increase in his costs. Perhaps more surprisingly, we show that the principal and he agent can both benefit from the increase in the agents costs under plausible conditions. Thus, increased inefficiency can be Pareto-improving. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:cin:ucecwp:2008-04&r=cta |
| By: | Noriyuki Yanagawa (Faculty of Economics, University of Tokyo) |
| Abstract: | When we intend to hire a professional expert, which type of expert should we hire? Although it is sometimes claimed that decisions of experts tend to be conservative, is it optimal to choose a conservative expert? This paper attempts to answer these questions. It will show that a principal should hire a conservative expert, i.e., an expert who has biased preference for maintaining the status quo. The crucial aspect is that there is a possibility that the expert may not transmit truthful information. A neutral expert or an expert who has biased preference for implementing the project has a very strong incentive to recommend the project. Even when he/she cannot recognize whether the project is sufficiently productive, he may recommend the project. Hence, a conservative expert is considered to be bene.cial for the principal. |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:tky:fseres:2008cf585&r=cta |
| By: | Kosmas Marinakis (Department of Economics, North Carolina State University); Theofanis Tsoulouhas (Department of Economics, North Carolina State University) |
| Abstract: | A celebrated result in the theory of tournaments is that relative performance evaluation (tournaments) is a superior compensation method to absolute performance evaluation (piece rate contracts) when the agents are risk-averse, the principal is risk-neutral or less risk-averse than the agents and production is subject to common shocks that are large relative to the idiosyncratic shocks. This is because tournaments get closer to the first best by filtering common uncertainty. This paper shows that, surprisingly, tournaments are superior even when agents are liquidity constrained so that transfers to them cannot fall short of a predetermined level. The rationale is that, by providing insurance against common shocks through a tournament, payments to the agents in unfavorable states increase and payments in favorable states decrease which enables the principal to satisfy tight liquidity constraints for the agents without paying any ex ante rents to them, while simultaneously providing higher-power incentives than under piece rates. |
| Keywords: | piece rates, tournaments, liquidity constraints |
| JEL: | D82 D21 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ncs:wpaper:019&r=cta |
| By: | Vasiliki Skreta |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:ste:nystbu:08-14&r=cta |
| By: | Thomas Borek; Stefan Bühler; Armin Schmutzler |
| Abstract: | This paper provides a simple reduced-form framework for analyzing merger decisions in the presence of asymmetric information about firm types, building on Shapiro's (1986) oligopoly model with asymmetric information about marginal costs. We employ this framework to examine what types of firms are likely to be involved in mergers. While we give sufficient conditions under which only low-type firms merge, as a lemons rationale would suggest, we also argue that these conditions will often be violated in practice. Finally, our analysis shows how signaling considerations affect merger decisions. |
| Keywords: | merger, asymmetric information, oligopoly |
| JEL: | D43 D82 L13 L33 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:usg:dp2008:2008-15&r=cta |
| By: | Lindbeck, Assar (Institute for International Economic Studies, Stockholm University); Persson, Mats (Institute for International Economic Studies, Stockholm University) |
| Abstract: | We develop a simple yet realistic model of income insurance, where the individual’s ability and willingness to work is treated as a continuous variable. In this framework, income insurance not only provides income smoothing, it also relieves the individual from particularly burdensome work. As a result, the individual adjusts his labor supply in a continuous fashion to the implicit tax wedge of the insurance system. Moral hazard, in the sense that an individual receives insurance benefits without actually being fully qualified, also becomes a matter of degree. Moreover, our continuous framework makes it easy to analyze both the role of administrative rejection of claims, and the role of social norms, for the utilization of insurance. |
| Keywords: | Moral hazard; disability insurance; work absence; administrative rejection; asymmetric information; social norms |
| JEL: | G22 H53 I38 J21 |
| Date: | 2008–08–29 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:iiessp:0756&r=cta |
| By: | Christa Hainz; (University of Munich, Akademiestr. 1/III, 80799 Munich, Germany; ) |
| Abstract: | The effects of bank competition and institutions on credit markets are usually studied separately although both factors are interdependent. We study the effect of bank competition on the choice of contracts (screening versus collateralized credit contract) and explicitly capture the impact of the institutional environment. Most importantly, we show that the effects of bank competition on collateralization, access to finance, and social welfare depend on the institutional environment. We predict that firms’ access to credit increases in bank competition if institutions are weak but bank competition does not matter if they are well-developed. |
| Keywords: | Strategic Experimentation, Two-Armed Bandit, Exponential Distribution, Poisson Process, Bayesian Learning, Markov Perfect Equilibrium |
| JEL: | D82 G21 K00 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:244&r=cta |
| By: | D'Exelle, Ben (University of Antwerp); Riedl, Arno (Maastricht University) |
| Abstract: | We experimentally study the influence of local information conditions on elite capture and social exclusion in community-based development schemes with heterogeneous groups. Not only information on the distribution of aid resources through community-based schemes, but also information on who makes use of an available punishment mechanism through majority voting may be important. The main results are the following. First, many rich community representatives try to satisfy a political majority who would then abstain from using the punishment mechanism, and exclude those community members whose approval is then not required. The frequency of this exclusion strategy is highest with private information on the distribution and public voting. Second, when voting is public, responders are more reluctant to make use of the punishment mechanism, and representatives who follow the exclusion strategy are more inclined to exclude the poorest responder. Third, punishment is largely ineffective as it induces rich representatives to capture all economic resources. Fourth, if a poor agent takes the representative’s role, punishment rates drop, efficiency increases, and final distributions become more equal. |
| Keywords: | distribution of aid, inequality, social exclusion, laboratory experiment |
| JEL: | D72 C91 |
| Date: | 2008–08 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp3673&r=cta |
| By: | Erwin Amann; Heng Qiao |
| Abstract: | Three critical cases, involving asymmetric and symmetric cases, in the sequential stages of the n-player repeated auctions are analyzed and compared. These cases might arise in a process of sequential, identical or equivalent auctions, where the auction result may reveal information about the strength or competitiveness of the participants. The behaviours of different players are characterized. Generally a player bids more aggressively when facing a strong player rather than a weak player. However a player favours competing with a weak one rather than a strong one. By applying the concept of Conditional Stochastic Dominance, revenues of players and the seller between the three stages are compared. It is proved that in this sequential process the information structure of the auctions changes and the seller’s revenue increases. Finally, this n-player asymmetric auction model can also be used to compare the revenues between high-bid and open auctions and especially the results first derived by Maskin and Riley (2000) in two-player case are proved to be valid in the n-player case. |
| Keywords: | Asymmetric auction; Revenue comparison |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:twi:respas:0037&r=cta |
| By: | Christopher J. Ellis (University of Oregon); John Fender |
| Abstract: | In this paper we combine Acemoglu’s model of the economic origins of democracy with Lohmann’s model of political massprotest. This alllows us to provide ananalysis of the economic causes of political regimec hange based on the micro foundations of rebellion. We are able tod erive conditons under which democracy arises peacefully, when it occurs only after a violent rebellion, and when oligarchy persists. We model these posibilities in a world of asymmetric information where information cascades are possible, and where these cascades may involve errors in a paratian sense. |
| Keywords: | Democracy, Information Cascades, Rebellion |
| JEL: | H0 P4 P16 |
| Date: | 2008–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:ore:uoecwp:2008-2&r=cta |
| By: | Akinobu Shuto (Research Institute for Economics and Business Administration, Kobe University); Tomomi Takada (Graduate School of Business Administration, Kobe University) |
| Abstract: | We examine the effect of managerial ownership on the demand for accounting conservatism as measured by the asymmetric timeliness of earnings (Basu, 1997). The separation of ownership and control as reflected by the levels of managerial ownership induce two agency problems between managers and shareholders: the incentive alignment effect and the management entrenchment effect. Since accounting conservatism is expected to mitigate agency problems between managers and shareholders, we predict that these agency problems increase the demand for accounting conservatism. We empirically test the relationship between managerial ownership and the asymmetric timeliness of earnings using a cubic form model for Japanese firms. We find that within the low and high levels of managerial ownership, managerial ownership is significantly negatively related to the asymmetric timeliness of earnings, which is consistent with the implication of the incentive alignment effect. We also find a significant positive relationship between managerial ownership and the asymmetric timeliness of earnings for the intermediate levels of managerial ownership, as suggested by the management entrenchment effect. Our results hold after controlling the market-to-book ratio, leverage, firm size, and year. These evidences support our prediction and suggest the possibility that accounting conservatism contributes to addressing the agency problem between managers and shareholders. |
| Keywords: | Managerial ownership; accounting conservatism; alignment effect; entrenchment effect |
| JEL: | M41 G32 |
| Date: | 2008–08 |
| URL: | http://d.repec.org/n?u=RePEc:kob:dpaper:227&r=cta |
| By: | Karl Inderfurth (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg); Guido Voigt (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg) |
| Abstract: | Screening contracts are a common approach to solve supply chain coordination problems under asymmetric information. Previous research in this area shows that asymmetric information leads to supply chain coordination deficits. We extend the standard framework of lotsizing decisions under asymmetric information by allowing investments in setup cost reduction. We find that asymmetric information leads to an overinvestment in setup cost reduction. Yet, the overall effect on supply chain performance is ambiguous. We show that these results holds for a wide variety of investment functions. |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:mag:wpaper:08016&r=cta |