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on Contract Theory and Applications |
| By: | Hertel, Jo; Smith, John |
| Abstract: | We model a game similar to the interaction between an academic advisor and advisee. Like the classic cheap talk setup, an informed player sends information to an uninformed receiver who is to take an action which affects the payoffs of both sender and receiver. However, unlike the classic cheap talk setup, the preferences regarding the receiver's actions are identical for both sender and receiver. Additionally, the sender incurs a communication cost which is increasing in the complexity of the message sent. We characterize the resulting equilibria. Under an additional out-of-equilibrium condition (Condition L), if preferences for sender and receiver are identical then the only equilibria are the most informative, feasible ones. A similar result appears in Chen, Kartik and Sobel (2008) when their No Incentive to Separate (NITS) condition is applied to the case where communication is costless but preferences diverge. Additionally, we model the competency of the advisee by the probability that the action is selected by mistake. We show that the informativeness of the sender is decreasing in the likelihood of the mistake. When the preferences between players diverge and when there are communication costs, we are not guaranteed uniqueness and we provide an example where an increase in communication costs can improve communication. |
| Keywords: | complexity; communication; cheap talk |
| JEL: | D82 D83 C72 |
| Date: | 2009–08–22 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:17056&r=cta |
| By: | Ho , Wai-Hong; Wang, Yong |
| Abstract: | This paper reexamines the issue of optimal capital income taxation in an endogenous growth model with overlapping generations. By assuming costly state verification for capital producing projects, we show that the presence of the information asymmetry creates inefficiency in the credit market by driving a wedge between the rate of interest and the rate of transformation. In this context, we further show that capital income taxation worsens the credit market distortions and, subsequently, induces greater adverse effects on growth and welfare. Taken together, our analysis suggests that the presence of informational frictions in the credit market introduces a rationale for more conservative taxation on capital income from both growth and welfare perspectives. |
| Keywords: | Capital income taxation; Asymmetric information; Economic growth |
| JEL: | H21 O41 D82 |
| Date: | 2009–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:17040&r=cta |
| By: | Christian Keuschnigg (University of St. Gallen (IFF-HSG), CEPR and CESifo); Evelyn Ribi (University of St. Gallen (IFF-HSG)) |
| Abstract: | In the absence of financing frictions, profit taxes reduce investment by their effect on the user cost of capital. With finance constraints due to moral hazard, investment becomes sensitive to cash-flow and own equity of firms. We propose a corporate finance model of investment and derive three central results: (i) Even small taxes impose first order welfare losses on financially constrained firms; (ii) ACE and cashflow tax systems, which are investment neutral in the neoclassical model, are no longer neutral when firms are finance constrained. (iii) When banks are active and provide external finance together with monitoring services, the two systems not only reduce investment, but are also no longer equivalent. With active banks, investment is subject to double moral hazard and the timing of tax payments becomes important. The ACE system gives tax relief at the return stage and provides better incentives than a cash-flow tax which gives tax relief upfront. |
| Keywords: | Finance constraints, profit tax, cash-flow tax, ACE tax |
| JEL: | G38 H25 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:btx:wpaper:0916&r=cta |
| By: | Janda, Karel |
| Abstract: | This article belongs to the game theoretic and information economics literature dealing with the problem of signaling in the context of game theoretical models of entry into the industry. As opposed to the majority of literature we consider the situation of asymmetric information where the private information belongs to the entrant. We model the capacity decision of the entrant as a signal of his strength. We show that in the Stackelberg model of market entry for some values of underlying parameters the entrant fully utilizes his capacity while for other parameter values he builds excess capacity. The model may be empirically relevant for industrial organization analysis of the entry of a new supplier to the existing supply chain. |
| Keywords: | Signaling; Entry; Capacity |
| JEL: | L13 D82 D43 |
| Date: | 2009–08–29 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:17007&r=cta |
| By: | Albert Banal-Estanol (City University of London and Universitat Pompeu Fabra); Paul Heidhues (University of Bonn and CEPR); Rainer Nitsche (European School of Management and Technology); Jo Seldeslachts (University of Amsterdam and WZB) |
| Abstract: | In our paper targets, by setting a reserve price, screen acquirers on their (expected) ability to generate merger-specific synergies. Both empirical evidence and many common merger models suggest that the difference between high- and low-synergy mergers becomes smaller during booms. This implies that the target’s opportunity cost for sorting out rel- atively less fitting acquirers increases and, hence, targets screen less tightly during booms, which leads to a hike in merger activity. Our screening mechanism not only predicts that merger activity is intense during economic booms and subdued during recessions but is also consistent with other stylized facts about takeovers and generates novel testable predictions. |
| Keywords: | Takeovers, Merger Waves, Defense Tactics, Screening |
| JEL: | D21 D80 L11 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:270&r=cta |
| By: | Schanz, Jochen (Bank of England) |
| Abstract: | Large, international banking groups have sought to centralise their cross-currency liquidity management: liquidity shortages in one currency are financed using liquidity surpluses in another currency. The nature of risks to financial stability emerging from global liquidity management depends on how these foreign exchange transactions settle. I analyse these risks in a game of asymmetric information. The main result is that the transition from local to global liquidity management, and better co-ordination in settlement of foreign exchange transactions, have two effects. On the one hand, the likelihood rises that payments are delayed beyond their due date. On the other hand, solvency shocks are less likely to be passed on to other banks. The main assumption is that lending between subsidiaries of the same banking group takes place under symmetric information, while external interbank market loans are extended under asymmetric information. More co-ordinated settlement increases the exposure of the intragroup lender relative to the interbank lender and leads to more informed lending. |
| Keywords: | Liquidity risk; foreign exchange settlement |
| JEL: | D82 F36 G20 G32 |
| Date: | 2009–08–24 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0374&r=cta |
| By: | Yuki, Kazuhiro |
| Abstract: | Many empirical works suggest that education has a positive effect on earnings not only because it raises human capital but also because it functions as a signal when employers have incomplete information on employees' skills. The signaling role could have important consequences on the dynamics of education, wages, and wage distribution when there exist intergenerational linkages in educational decisions. This paper examines the dynamic effects in an economy where education has the dual roles and some fraction of individuals is credit constrained from taking education. In particular, it investigates how the number of educated individuals, the importance of the signaling value of education, and the wage inequality between educated and uneducated workers change over time in such economy, and compares the dynamics with those when education does not function as a signal. It also examines whether the signaling role leads to higher aggregate consumption or not in the long run. |
| Keywords: | Human capital; Education; Signaling; Statistical discrimination; Credit constraint |
| JEL: | O11 I20 O15 J24 |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:16982&r=cta |