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on Contract Theory and Applications |
| By: | Geoffroy de Clippel; David Pérez-Castrillo; David Wettstein |
| Abstract: | We propose a definition of egalitarian equivalence that extends Pazner and Schmeidler's (1978) concept to environments with incomplete information. If every feasible allocation rule can be implemented by an incentive compatible mechanism (as, for instance, in the case of non-exclusive information), then interim egalitarian equivalence and interim incentive efficiency remain compatible, as they were under complete information. When incentive constraints are more restrictive, on the other hand, the two criteria may become incompatible. |
| Keywords: | Pareto Efficiency, Egalitarian Equivalence, Asymmetric Information |
| JEL: | D62 C71 |
| Date: | 2010–03–10 |
| URL: | http://d.repec.org/n?u=RePEc:aub:autbar:813.10&r=cta |
| By: | Jana Krajcova |
| Abstract: | In this paper, I analyze the effects of monitoring on an agent’s incentives in a two-period principal-agent model in which the agent decides on his effort and corruptibility. The agent’s type and strategy are unknown to the principal. I compare incentive-compatible wages under three different scenarios: when the principal does not monitor and only observes output; when she monitors the agent’s effort choice; and when she monitors the agent’s corruptibility. I find that monitoring of effort improves the sorting of types but it might also give the agent more incentive to be corrupt. Monitoring of corruption does not improve the sorting of types but it negatively affects the agent’s incentive to be corrupt. |
| Keywords: | Corruption, monitoring, contract, incentive-compatibility. |
| JEL: | D73 D86 K42 |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:cer:papers:wp404&r=cta |
| By: | Dur, Robert (Erasmus University Rotterdam); Non, Arjan (Erasmus University Rotterdam); Roelfsema, Hein (Utrecht School of Economics) |
| Abstract: | We study optimal incentive contracts for workers who are reciprocal to management attention. When neither worker's effort nor manager's attention can be contracted, a double moral-hazard problem arises, implying that reciprocal workers should be given weak financial incentives. In a multiple-agent setting, this problem can be resolved using promotion incentives. We empirically examine these predictions using data from the German Socio-Economic Panel. We find that workers who are more reciprocal are significantly more likely to receive promotion incentives, while there is no such relation for individual bonus pay. |
| Keywords: | reciprocity, social exchange, incentive contracts, double moral hazard, GSOEP |
| JEL: | D86 J41 M51 M52 M54 M55 |
| Date: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp4782&r=cta |
| By: | Ryo Ogawa |
| Abstract: | In dynamic principal-agent relationships, it is sometimes observed that the agent's reward depends only on the final outcome. For example, a student's grade in a course quite often depends only on the final exam score, where the performance in the problem sets and the mid-term exam is ignored. The present paper shows that such an arrangement can be optimal if the agent's effort in each period has strong persistent effects. It is shown that the optimality of such a simple payment scheme crucially depends on the first order stochastic dominance of the final outcome under various effort sequences. |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:dpr:wpaper:0767&r=cta |
| By: | Caterina Giannetti; Nicola Jentzsch; Giancarlo Spagnolo |
| Abstract: | Information asymmetries can severely limit cross-border border expansion of banks. When a bank enters a new market, it has incomplete information about potential new clients. Such asymmetries are reduced by credit registers, which distribute financial data on bank clients. We investigate the interaction of credit registers and bank entry modes (in form of branching and M&A) by using a new set of time series cross-section data for the EU-27 countries. We study how the presence of public and private credit registers and the type of information exchanged affect bank entry modes during the period 1990-2007. Our analysis shows that the existence of both types of registers increases the share of branching in the overall entries. Additionally, the establishment of public registers reduces concentration ratios, and some banking competition indicators (such as overhead costs/assets). The introduction of a private credit bureau, on the other hand, has no effect on concentration ratios, but positively contributes to competition (by decreasing interest rate margins). This suggests that credit registers facilitate direct entry through a reduction of information asymmetries, which in turn intensifies competition. |
| Keywords: | credit registries, foreign entry, asymmetric information |
| JEL: | F37 G21 G34 L13 O16 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp980&r=cta |
| By: | Elmar Mertens |
| Abstract: | In models of monetary policy, discretionary policymaking often lacks the ability to manage public beliefs, which explains the theoretical appeal of policy rules and commitment strategies. But as shown in this paper, when a policymaker possesses private information, belief management becomes an integral part of optimal discretion policies and improves their performance. ; Solving for optimal policy in a simple New Keynesian model, this paper shows how discretionary losses are reduced when the policymaker has private information. Furthermore, disinflations are pursued more vigorously, when the hidden information problem is larger, even when inflation is partly backward-looking. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2010-11&r=cta |
| By: | Lionel De Boisdeffre (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I) |
| Abstract: | In three related papers, we consider a pure exchange financial economy, where agents may observe private information signals, form private anticipations and face an "exogenous uncertainty", on the future state, and an "endogenous uncertainty", on the future prices. At a sequential equilibrium, all agents expect the "true" price as a possible outcome, and elect optimal strategies, which clear on all markets at every time period. This concept differs from both traditional ones of temporary equilibrium and sequential equilibrium with perfect foresight. The first paper, developed hereafter, illustrates, on a heuristic example, why changing anticipations may alter equilibrium prices and allocations, explain bubbles or crashes on markets at equilibrium, or preclude any perfect price foresight. The second paper shows that correct anticipations need always embed a set of "minimum uncertainty", depending on observed prices and the fundamental characteristics of the economy, and studies the properties of this set. The third paper proves, in the complete model, that the existence of a sequential equilibrium is still characterized by the no-arbitrage condition. |
| Keywords: | Sequential equilibrium ; temporary equilibrium ; anticipations ; endogenous uncertainty ; incomplete markets ; asymmetric information ; arbitrage ; existence |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00460884_v1&r=cta |
| By: | Rosen Valchev (Duquesne University); Antony Davies (Duquesne University) |
| Abstract: | Existing research suggests that bureaucrats’ optimal behavior is to maximize their agency’s budgets, but does not account for information imperfections nor explore the tactics bureaucrats employ in maximizing their budgets. Drawing on the rational expectations literature, we propose a new theoretical model that describes the behaviors of politicians who, using imperfect information, judge an agency’s performance, and bureaucrats who, by varying the agency’s transparency, alter the degree of information imperfection and so influence the politicians’ abilities to judge the agency’s performance. We then fit data from the government’s Performance Accountability Reports and the Scorecard data set to our model and obtain empirical results that are consistent with what our theoretical model predicts. |
| Keywords: | bureaucracy; agency; budget; budget maximization; transparency; performance; imperfect information; Government Performance Reports Act; Scorecard |
| JEL: | H11 D73 D82 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:gwc:wpaper:2009-004&r=cta |
| By: | Frederick van der Ploeg; Dominic Rohner |
| Abstract: | Although the relationship between natural resources and civil war has received much attention, little is known about the underlying mechanisms. Controversies and contradictions in the stylized facts persist because resource extraction is treated as exogenous while in reality fighting affects extraction. We study endogenous fighting, armament, and extraction method, speed and investment. Rapacious resource exploitation has economic costs, but can nevertheless be preferred to balanced depletion due to lowered incentives for future rebel attacks. With private exploitation, rebels fight more than the government if they can renege on the contract with the mining company, and hence government turnover is larger in this case. Incentive-compatible license fees paid by private companies and mining investment are lower in unstable countries, and increase with the quality of the government army and office rents. This implies that privatised resource exploitation is more attractive for governments who have incentives to fight hard, i.e., in the presence of large office rents and a strong army. With endogenous weapon investments, the government invests more under balanced than under rapacious or private extraction. If the government can commit before mining licenses are auctioned, it will invest more in weapons under private extraction than under balanced and rapacious nationalized extraction. |
| Keywords: | Conflict, natural resources, private resource exploitation, mining investment, license fee |
| JEL: | D45 D74 L71 Q34 |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:zur:iewwpx:481&r=cta |
| By: | Jos Jansen (Max Planck Institute for Research on Collective Goods) |
| Abstract: | I study the incentives of Cournot duopolists to share their technologies with their competitor in markets where intellectual property rights are absent and imitation is costless. The trade-off between a signaling effect and an expropriation effect determines the technology-sharing incentives. In equilibrium at most one firm shares some of its technologies. For similar technology distributions, there exists an equilibrium in which nobody shares. If the technology distributions are skewed towards efficient technologies, then there may exist equilibria in which one firm shares all technologies, only the best technologies, or only intermediate technologies. No other equilibria can exist. |
| Keywords: | Innovation, strategic disclosure, trade secret, Cournot duopoly, indivisibility, open source, skewed distribution |
| JEL: | D82 L13 O32 O34 L17 |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:mpg:wpaper:2009_36&r=cta |
| By: | N. Narajabad, Borghan |
| Abstract: | Several studies attributed the rise of household bankruptcy in the past two decades to the decline of social stigma associated with default. Stigma explanations, however, cannot account for the increase of credit availability during this period. I try to explain both of these facts as a result of a more informative credit rating technology. I study an adverse selection environment where borrowers are heterogeneous with respect to their cost of default. Creditors have access to a rating technology which provides an exogenous signal about borrowers' default costs. Equilibrium contracts subject each borrower to a credit limit such that the creditors' expected profit, conditional on the signal about the borrower's default cost, is zero. As the exogenous signal becomes more informative, the credit market will provide higher credit limits for borrowers with high default costs, and lowers credit limits of borrowers with low costs of default. Hence a more informative signal allows those with high default costs to borrow more, making them more likely to default, while decreasing borrowing and default by those with low default costs. Using Simulated Method of Moments, I estimate the model parameters to match the increases in the average consumer credit card limit, the average unsecured consumer debt level and the spread of the credit limit distribution from 1992 to 1998 using the Survey of Consumer Finance's data. The model does well in matching the targeted moments and can account for one third to half of the increase in the number of bankruptcy filings from 1992 to 1998. |
| Keywords: | Consumer Bankruptcy; Information and Market Efficiency; Rating Agencies. |
| JEL: | G14 K35 E44 E21 |
| Date: | 2010–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:21058&r=cta |
| By: | Ockenfels, Axel (University of Cologne); Sliwka, Dirk (University of Cologne); Werner, Peter (University of Cologne) |
| Abstract: | We investigate how bonus payments affect satisfaction and performance of managers in a large, multinational company. We find that falling behind a naturally occurring reference point for bonus comparisons reduces satisfaction and subsequent performance. The effects tend to be mitigated if information about one's relative standing towards the reference point is withheld. |
| Keywords: | reference points, incentives, bonus payments, job satisfaction, job performance |
| JEL: | M52 |
| Date: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp4795&r=cta |