|
on Contract Theory and Applications |
|
Issue of 2009‒01‒03
eighteen papers chosen by Simona Fabrizi Massey University Department of Commerce |
| By: | Thomas Tröger; Tymofiy Mylovanov |
| Abstract: | We consider the problem of mechanism design by a principal who has private information. We point out a simple condition under which the privacy of the principal's information is irrelevant in the sense that the mechanism implemented by the principal coincides with the mechanism that would be optimal if the principal's information were publicly known. This condition is then used to show that the privacy of the principal's information is irrelevant in many environments with private values and quasi-linear preferences, including the Myerson's classical auction environments in which the seller is privately informed about her cost of selling. Our approach unifies results by Maskin and Tirole, Tan, Yilankaya, Skreta, and Balestrieri. We also provide an example of a classical principal-agent environment with private values and quasi-linear preferences where a privately informed principal can do better than when her information is public. |
| Keywords: | independent private values, optimal auction, resale, inverse virtual valuation function |
| JEL: | D44 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:bon:bonedp:bgse21_2008&r=cta |
| By: | Ana Pinto Borges (Faculdade de Economia, Universidade do Porto); João Correia-da-Silva (CEMPRE and Faculdade de Economia, Universidade do Porto) |
| Abstract: | We study regulation of a bureaucratic provider of a public good in the presence of moral hazard and adverse selection. By bureaucratic we mean that it values output in itself, and not only profit. Three different financing systems are studied - cost reimbursement, prospective payment, and the optimal contract. In all cases, the output level increases with the bureaucratic bias. We find that the optimal contract is linear in cost (fixed payment plus partial cost-reimbursement). A stronger preference for high output reduces the tendency of the firm to announce a high cost (adverse selection), allowing a more powered incentive scheme (a lower fraction of the costs is reimbursed), which alleviates the problem of moral hazard. |
| Keywords: | Procurement, Regulation, Adverse selection, Moral hazard, Bureaucracy |
| JEL: | D82 H41 H51 I11 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:por:fepwps:304&r=cta |
| By: | Robert S. Gazzale (Williams College); Tapan Khopkar |
| Abstract: | By providing incentives for sellers to act in a trustworthy manner, reputation mechanisms in many online environments can mitigate moral-hazard problems when particular buyers and sellers interact infrequently. However, these mechanisms rely on buyers sharing their private information about sellers with the community, and thus may suffer from too little feedback when its provision is costly. In this experimental study, we compare a standard feedback mechanism to one in which sellers can inspect a buyer's feedback-provision history, thus providing the buyer with incentives to share private information even when costly. We find fairly high trust and trustworthiness levels in all markets, with buyers showing a willingness to provide costly feedback, especially negative feedback, sufficient to induce seller trustworthiness. While we find, ceteris paribus, evidence that the availability of feedback-provision histories increases buyer trust by reducing missing feedback, it did not improve overall trustworthiness as this information enabled sellers to discriminate and act in a trustworthy manner less frequently with those who share information less frequently. |
| Keywords: | experimental economics, trust, reputation, electronic markets |
| JEL: | C72 C73 C91 C92 D82 L14 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:wil:wileco:2008-22&r=cta |
| By: | Eric Maskin (Institute for Advanced Study, School of Social Science) |
| Keywords: | Nash, mechanism design |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:ads:wpaper:0086&r=cta |
| By: | Kosfeld, Michael (University of Frankfurt); von Siemens, Ferdinand (University of Amsterdam) |
| Abstract: | We investigate a competitive labor market with team production. Workers differ in their motivation to exert team effort and types are private information. We show that there can exist a separating equilibrium in which workers self-select into different firms and firms employing cooperative workers make strictly positive profits. Profit differences across firms persist because cooperation strictly increases output and worker separation requires firms employing cooperative workers to pay out weakly lower wages. |
| Keywords: | team work, self-selection |
| JEL: | D82 D86 M50 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp3881&r=cta |
| By: | Ángel Hernando Veciana (Universidad de Alicante); Fabio Michelucci (California Institute of Technology) |
| Abstract: | We characterize the incentive compatible allocation that maximizes the expected social surplus in a single-unit sale when the efficient allocation is not implementable. This allocation may involve no selling when it is efficient to sell. We then show that the English auction always implements the second best allocation when there are only two bidders, but not with more than two. Our model employs a unidimensional type space with independent types and allocative externalities, but captures some features of models with multidimensional types. |
| Keywords: | Efficiency, auctions, mechanism design |
| JEL: | D44 D82 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:ivi:wpasad:2008-17&r=cta |
| By: | Raluca E. Buia (Advanced School of Economics, University Of Venice Cà Foscari); M. Cristina Molinari (Department of Economics, University Of Venice Cà Foscari) |
| Abstract: | We consider the supply of a public good based on a publicly-owned facility. The Government has a choice between provision in-house and privatizing the facility and then outsourcing the production. In particular, we focus on corruption in the decision to privatize and on its effect on social welfare when there is asymmetric information on the public and private manager's efficiency. Our analysis shows that a corrupt Government, that chooses to privatize only in exchange for a bribe, makes a positive selection on the private firm's efficiency and, thus, may raise expected social welfare above what an honest Government could get. |
| Keywords: | Corruption, Privatization, Private vs. public provision. |
| JEL: | D73 H44 K42 L33 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:ven:wpaper:2008_43&r=cta |
| By: | Elisabetta Iossa (Faculty of Economics, University of Rome "Tor Vergata"); David Martimort (Toulouse School of Economics) |
| Abstract: | We build a unified theoretical framework to analyze the main incentive issues in Public Private Partnerships (PPPs) and the shape of optimal contracts in those contexts. We present a basic model of procurement in a multitask environment in which a risk-averse agent chooses unobservable efforts in cost reduction and quality improvement. We begin by studying the effect on incentives and risk transfer of bundling building and operation into a single contract, allowing for different assumptions on the contractual framework and the quality of the information held by the government. We then extend the basic model in several directions. We consider the factors that affect the optimal allocation of demand risk and their implications for the use of user charges and the choice of contract length. We study the relationship between the operator and its financiers and the impact of private finance. We discuss the trade-off between incentive and flexibility in long-term PPP agreements and the dynamics of PPP contracts, including cost overruns. We also consider how the institutional environment, and specifically the risk of regulatory opportunism, affects contract design and incentives. We conclude with some policy implications on the desirability of PPPs. |
| Keywords: | Contracting out, public-private partnerships, public-service provision. |
| JEL: | D8 L5 H54 H57 |
| Date: | 2008–12–19 |
| URL: | http://d.repec.org/n?u=RePEc:rtv:ceisrp:139&r=cta |
| By: | Miglo, A. |
| Abstract: | In recent years financing through the creation of an independent project company or financing by non-recourse debt has become an important part of corporate decisions. Shah and Thakor (JET, 1987) argue that project financing can be optimal when asymmetric information exists between firm's insiders and market participants. In contrast to that paper, we provide an asymmetric information argument for project financing without relying on corporate taxes, costly information production or an assumption that firms have the same mean of return. In addition, the model generates new predictions regarding asset securitization. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:gue:guelph:2008-12&r=cta |
| By: | Eric Rasmusen (Department of Business Economics and Public Policy, Indiana University Kelley School of Business); Young-Ro Yoon (Department of Economics, Indiana University) |
| Abstract: | Is it better to move first, or second— to innovate, or to imitate? We look at this in a context with both asymmetric information and payoff externalities. Suppose two players, one with superior information about market quality, consider entering one of two new markets immediately or waiting until the last possible date. We show that the more accurate the informed player’s information, the more he wants to delay to keep his information private. The less-informed player also wants to delay, but in order to learn. The less accurate the informed player’s information, the more both players want to move first to foreclose a market. More accurate information can lead to inefficiency by increasing the players’ incentive to delay. Thus, a moderate delay cost can increase industry profits. |
| Keywords: | market entry, first- and second mover advantage, payoff externalities, informational externalities, endogenous timing |
| JEL: | D81 D82 L13 |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:iuk:wpaper:2008-15&r=cta |
| By: | Fehr, Ernst (University of Zurich); Hart, Oliver (Harvard University); Zehnder, Christian (University of Lausanne) |
| Abstract: | In a recent paper, Hart and Moore (2008) introduce new behavioral assumptions that can explain long term contracts and important aspects of the employment relation. However, so far there exists no direct evidence that supports these assumptions and, in particular, Hart and Moore's notion that contracts provide reference points. In this paper, we examine experimentally the behavioral forces stipulated in their theory. The evidence confirms the model's prediction that there is a tradeoff between rigidity and flexibility in a trading environment with incomplete contracts and ex ante uncertainty about the state of nature. Flexible contracts – which would dominate rigid contracts under standard assumptions –cause a significant amount of shading on ex post performance while under rigid contracts much less shading occurs. Thus, although rigid contracts rule out trading in some states of the world, parties frequently implement them. While our results are broadly consistent with established behavioral concepts, they cannot easily be explained by existing theories. The experiment appears to reveal a new behavioral force: ex ante competition legitimizes the terms of a contract, and aggrievement and shading occur mainly about outcomes within the contract. |
| Keywords: | contracts, reference points, experiment |
| JEL: | C7 D00 D2 D8 K00 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp3889&r=cta |
| By: | Stefanie Anelia Lehmann |
| Abstract: | In the context of principal-agent theory risk is largely seen as a source that causes inefficiencies and lowers incentives and accordingly is not in the principal’s interest. In this paper I compare two different designs of a collective tournament where output in a team is generated through a particular two-stage production process. I show within a theoretical tournament framework that risk in terms of chance is beneficial from the point of view of a profit maximizing principal who organizes the tournament. Selecting an agent randomly that has to work at the final stage after all agents exerted effort at the first stage helps the principal to overcome a trade-off in incentive provision he faces when selecting the agent who works at the final stage before the tournament starts. This trade-off causes optimal efforts to be lower in a tournament without random selection compared to a tournament with random selection. As the higher efforts overcompensate additional wage costs the principal earns higher expected profits when selecting the agent that has to work at the second stage randomly after the first stage. |
| Keywords: | collective tournament, incentives, randomization, risk |
| JEL: | D2 J3 M5 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:bon:bonedp:bgse19_2008&r=cta |
| By: | Alberto Bennardo (Università di Salerno, CSEF, and CEPR); Marco Pagano (Università di Napoli Federico II, CSEF, EIEF and CEPR); Salvatore Piccolo (Università di Napoli Federico II, CSEF, and TSE) |
| Abstract: | When a customer can borrow from several competing banks, lending by each of them raises the customer’s default risk. If creditor rights are poorly protected, this contractual externality can generate equilibria with rationing, as well as others with excessive lending or non-competitive rates. Information sharing among banks about clients’ past indebtedness reduces interest and default rates, improves entrepreneurs’ access to credit (unless the value of collateral is very uncertain) and may act as a substitute for creditor rights protection. If information sharing also allows banks to monitor their clients’ subsequent indebtedness, the credit market may achieve full efficiency. |
| Keywords: | information sharing, multiple banks, creditor rights, seniority, non-exclusivity |
| JEL: | D73 K21 K42 L51 |
| Date: | 2008–12–31 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:211&r=cta |
| By: | Yiquan Gu |
| Abstract: | This paper proposes a model for a certification market with an imperfect testing technology. Such a technology only assures that whenever two products are tested the higher quality product is more likely to pass than the lower quality one.When only one certifier with such testing technology is present in the market, it is found that this monopoly certifier can be completely ignored in equilibrium, in contrast to the prediction of a model with perfect testing technology. A separating equilibrium is also supported in which only relatively high quality types (products) choose to pay for the certification service. It is true that in such an equilibrium having a certificate is better than not. The exact value of a certificate, however, depends both on the prior distribution of product quality and the nature of the testing technology.Welfare accounting shows that the monopolistic certifier’s profit maximizing conduct can lead to under or over supply of certification service depending on model specification. Optimal certification fee is always positive and such that it makes all positive types choose to test. In the case of two competing certifiers with identical testing technologies, the intuition of Bertrand competition does not necessarily hold. Segmentation equilibrium in which higher seller types choose the more expensive certification service and not so high types choose the less expensive service can be supported. As an application, we argue that the fee differentiation between major and non-major auditing firms need not be a result of any differences in their auditing technologies. |
| Keywords: | Asymmetric information, imperfect certification |
| JEL: | C72 D82 L15 |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:rwi:repape:0078&r=cta |
| By: | Eric Rasmusen (Department of Business Economics and Public Policy, Indiana University Kelley School of Business); Manu Raghav, (Department of Economics and Management, Depauw University); Mark Ramseyer (Harvard Law School) |
| Abstract: | Is it better to move first, or second— to innovate, or to imitate? We look at this in a context with both asymmetric information and payoff externalities. Suppose two players, one with superior information about market quality, consider entering one of two new markets immediately or waiting until the last possible date. We show that the more accurate the informed player’s information, the more he wants to delay to keep his information private. The less-informed player also wants to delay, but in order to learn. The less accurate the informed player’s information, the more both players want to move first to foreclose a market. More accurate information can lead to inefficiency by increasing the players’ incentive to delay. Thus, a moderate delay cost can increase industry profits. |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:iuk:wpaper:2008-16&r=cta |
| By: | Bernard Lebrun (York University, Toronto) |
| Abstract: | In the independent-private-value model, we allow resale among bidders following a first-price sealed-bid, second-price sealed-bid, or English auction with two bidders. We consider two regimes with regard to the disclosure of the sealed bids: full disclosure and no disclosure. Either the auction winner or the auction loser chooses the resale mechanism. Thanks to three key properties our model shares with the common-value model, we obtain explicit formulas for the equilibria. We circumvent the “ratchet effect,” by “randomizing” every pure equilibrium under no disclosure into an equivalent behavioral equilibrium under full disclosure. We compare the auctioneer’s revenues across auctions and bargaining procedures. We present some nbidder extensions. |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:yca:wpaper:2008_06&r=cta |
| By: | Kohei Kawamura |
| Abstract: | This paper studies information transmission between multiple agents with different preferences and a welfare maximizing decision maker who chooses the quality or quantity of a public good (e.g. provision of public health service; carbon emissions policy; pace of lectures in a classroom) that is consumed by all of them. Communication in such circumstances su¤ers from the agents. incentive to "exaggerate" their preferences relative to the average of the other agents, since the decision maker's reaction to each agent's message is weaker than in one-to-one communication. As the number of agents becomes larger the quality of information transmission diminishes. The use of binary messages (e.g. "yes" or "no") is shown to be a robust mode of communication when the main source of informational distortion is exaggeration. |
| Keywords: | : Communication, Public Good Provision, Cheap Talk, Committee, Non-binding Referendum |
| JEL: | D71 D82 H41 |
| Date: | 2008–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:edn:esedps:182&r=cta |
| By: | Ana Espinola-Arredondo; Esther Gal-Or; Felix Munoz-Garcia (School of Economic Sciences, Washington State University) |
| Abstract: | We examine an incumbent?s trade-o¤ between expanding her business, which increases her pro?ts, and the information that such expansion signals to potential competitors, which attracts them to the market. Speci?cally, we consider a signaling game where the incumbent knows the actual realization of demand, whereas the entrant can only observe whether the incumbent de- cided to expand the size of her business in the past. In particular, we analyze the set of pooling and separating equilibria surviving the intuitive criterion in this signaling model. Our predic- tions can support the expected observation that only incumbents in good market conditions expand their businesses (separating equilibria), but also the less obvious and interesting pooling equilibria in which no ?rm expands her business, and despite such non-expansion entrants choose to enter the industry. This equilibrium result helps us provide an explanation about the high failure rates that new ?rms face when entering a market, as con?rmed by multiple empirical studies. |
| Keywords: | Business expansion, Signaling, Entry deterrence. Failure rates. |
| JEL: | L12 D82 |
| Date: | 2008–08 |
| URL: | http://d.repec.org/n?u=RePEc:wsu:wpaper:espinola-4&r=cta |