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on Contract Theory and Applications |
| By: | Fabian Herweg; Daniel Müller; Philipp Weinschenk |
| Abstract: | This paper extends the standard principal-agent model with moral hazard to allow for agents having reference- dependent preferences according to Köszegi and Rabin (2006, 2007). The main finding is that loss aversion leads to fairly simple contracts. In particular, when shifting the focus from standard risk aversion to loss aversion, the optimal contract is a simple bonus contract, i.e. when the agent's performance exceeds a certain threshold he receives a fixed bonus payment. Moreover, if the agent is sufficiently loss averse, it is shown that the first-order approach is not necessarily valid. If this is the case the principal may be unable to fine-tune incentives. Strategic ignorance of information by the principal, however, allows to overcome these problems and may even reduce the cost of implementation. |
| Keywords: | Agency Model; Moral Hazard; Reference-Dependent Preferences; Loss Aversion |
| JEL: | D8 M1 M5 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:bon:bonedp:bgse17_2008&r=cta |
| By: | Stéphane Auray (Université Lille 3 (GREMARS), Université de Sherbrooke (GREDI) and CIRPÉE); Thomas Mariotti (Toulouse School of Economics (GREMAQ/CNRS and IDEI)); Fabien Moizeau (Toulouse School of Economics (GREMAQ)) |
| Abstract: | We investigate the design of incentives for quality provision in a dynamic regulation setting in which maintenance efforts and quality shocks have durable effects. When the regulator contracts with a sequence of agents, asymmetries of information can lead to overprovision of quality, reflecting a dynamic rent extraction motive. When the regulator hires a single agent to manage quality, over-provision of quality can also be used by the regulator to strengthen dynamic incentives. We further show that for small levels of asymmetric information, the regulator may prefer contracting with a sequence of agents rather than hiring a single agent if high quality shocks are relatively unfrequent, provided all parties can commit to a long-term contract. When no such commitment is feasible, the fact that quality physically links periods together leads to a ratchet effect even under recurring private information, and shorter franchises are beneficial from a social viewpoint. |
| Keywords: | Quality, Regulation, Asymmetric Information |
| JEL: | D82 L15 L51 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:shr:wpaper:08-11&r=cta |
| By: | Matthias Kräkel |
| Abstract: | Several empirical studies have challenged tournament theory by pointing out that (1) there is considerable pay variation within hierarchy levels, (2) promotion premiums only in part explain hierarchical wage differences and (3) external recruitment is observable on nearly any hierarchy level. We explain these empirical puzzles by combining job-promotion tournaments with higher-level bonus payments in a two-tier hierarchy. Moreover, we show that under certain conditions the firm implements first-best effort on tier 2 although workers earn strictly positive rents. The reason is that the firm can use second-tier rents for creating incentives on tier 1. If workers are heterogeneous, the firm strictly improves the selection quality of a job-promotion tournament by employing a hybrid incentive scheme that includes bonus payments. |
| Keywords: | bonuses; external recruitment; job promotion; limited liability; tournaments |
| JEL: | D82 D86 J33 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:bon:bonedp:bgse16_2008&r=cta |
| By: | Cosnita, A.; Tropeano, J.P. |
| Abstract: | This paper contributes to the economic analysis of merger control by taking into account the efficiency gains for the design of structural merger remedies when the competition authorities do not observe the magnitude of efficiency gains. We show that whenever divestitures are necessary, the Competition Authority will need to extract from the merging partners their private information on the merger’s efficiency gains. For this we propose a revelation mechanism combining divestitures with two additional tools, the regulation of the divestitures sale price and a merger fee. We show that an optimal combination of both instruments is effective: the most efficient merged firms are claimed to pay a merger fee while the less efficient divest asets at an upwards distorted sale price. |
| Keywords: | MERGER CONTROL;STRUCTURAL MERGER;REMEDIES;ASYMETRIC INFORMATION |
| JEL: | L41 D82 K21 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:gbl:wpaper:200803&r=cta |
| By: | Menno Middeldorp; Stephanie Rosenkranz |
| Abstract: | Theoretical results from previous work, presented in Kool, Middeldorp and Rosenkranz (2007), suggest that central bank communication crowds out private information acquisition and that this effect can lead to a deterioration of the ability of financial markets to predict future policy interest rates. We examine this result in an experimental asset market that closely follows the theoretical model. Crowding out of information acquisition takes place and, where this crowding out is most rapid, there is deterioration of the market’s predictive ability. This supports the theoretical result that central bank communication can actually make it more difficult for financial markets to predict future policy rates. |
| Keywords: | Experimental Economics, Private Information Acquisition, Information and Financial Market Efficiency, Central bank transparency and communication |
| JEL: | C92 D82 E58 G14 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:use:tkiwps:0826&r=cta |
| By: | Pierangelo Mori (Università degli Studi di Firenze, Dipartimento di Scienze Economiche) |
| Abstract: | The paper’s main aim is to identify under which conditions the criterion of prior-independent optimality is applicable in the design of multidimensional franchise auctions. We first establish an impossibility result for second-score auctions by showing that in single-crossing environments necessary and sufficient condition for score functions to be optimal in this sense is that bidders have equal variable cost functions. Then we show that the result is not confined to the second-score format but holds for any scoring auction under stochastic independence. Therefore, a regulator who has no information at all about firms’ costs cannot in such circumstances avail himself of prior-independent optimality as choice criterion. Conversely, if variable cost functions are equal across potential contractors, as is likely in certain public services markets, and the regulator knows it, it is possible for him to implement a prior-independent optimum by scoring bids according to the social welfare function under various auction formats, including first- and second-score auctions. This simple prescription however no longer applies if the regulator is ignorant about market demand too. In this case a fully rational choice of the score function is precluded, though it may be possible to make a reasonable one: a brief discussion of this point closes the paper. |
| JEL: | D44 H57 L51 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:frz:wpaper:wp2008_13.rdf&r=cta |
| By: | Andriy Zapechelnyuk; Ro'i Zultan |
| Date: | 2008–10–12 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levarc:122247000000002411&r=cta |
| By: | Hakki Yazici |
| Abstract: | This paper studies efficient allocation of resources in an economy in which agents are initially heterogeneous with regard to their wealth levels and whether they have ideas or not. An agent with an idea can start a business that generates random returns. Agents have private information about (1) their initial types, (2) how they allocate their resources, and (3) the realized returns. The unobservability of returns creates a novel motive for subsidizing agents who have ideas but lack resources to invest in them. To analyze this motive in isolation, the paper assumes that agents are risk-neutral and abstracts away from equality and insurance considerations. The unobservability of initial types and actions implies that the subsidy that poor agents with ideas receive is limited by incentive compatibility: the society should provide other agents with enough incentives so that they do not claim to be poor and have ideas. The paper then provides an implementation of the constrained-efficient allocation in an incomplete markets setup that is similar to the U.S. Small Business Administration's Business Loan Program. Finally, the paper extends the model in several dimensions to show that the results are robust to these generalizations of the model. |
| Keywords: | Productivity |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmwp:665&r=cta |
| By: | Raj Chetty; Emmanuel Saez |
| Abstract: | This paper characterizes the welfare gains from redistributive taxation and social insurance in an environment where the private sector provides partial insurance. We analyze stylized models in which adverse selection, pre-existing information, or imperfect optimization in private insurance markets create a role for government intervention. We derive simple formulas that map reduced-form empirical estimates into quantitative predictions for optimal tax and social insurance policy. Applications to unemployment and health insurance show that taking private market insurance into account matters significantly for optimal benefit levels given existing empirical estimates of the key parameters. |
| JEL: | D6 H0 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14403&r=cta |