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on Contract Theory and Applications |
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Issue of 2010‒03‒28
sixteen papers chosen by Simona Fabrizi Massey University Department of Commerce |
| By: | Federico Etro; Michela Cella |
| Abstract: | We analyze competition between firms engaged in R&D activities in the choice of incentive contracts for managers with hidden productivities. The equilibrium screening contracts require extra effort/investment from the most productive managers compared to the first best contracts: under additional assumptions on the hazard rate of the distribution of types we obtain no- distortion in the middle rather than at the top. Moreover, the equilibrium contracts are characterized by effort differentials between (any) two types that are always increasing with the number of firms, suggesting a positive re- lation between competition and high-powered incentives. An inverted-U curve between competition and absolute investments can emerge for the most pro- ductive managers, especially when entry is endogenous. These results persist when contracts are not observable, when they include quantity precommit- ments, and when products are imperfect substitutes. |
| Keywords: | Principal-agent contracts, asymmetric information, endogenous market structures |
| JEL: | D82 D L13 |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:mib:wpaper:180&r=cta |
| By: | Silvia Platoni (DISCE, Università Cattolica) |
| Abstract: | This paper proposes a model which analyses not only the provision of incentives (see, e.g., Gershkov et. al 2006 and Huck et al. 2001) and the moral hazard problem (see, e.g., Holmstrom 1982), but also the adverse selection problem (i.e. the workers are heterogeneous). Moreover, unlike the previous works, the paper introduces also the time dimension: we consider a firm with an infinite time horizon and individuals whose working life is split into two phases, the young phase and old phase. By comparing the results of the classical incentives scheme with those of a rewarding incentives scheme, we can conclude that this last scheme allows a higher production level. |
| Keywords: | asymmetric information, incentives |
| JEL: | D82 D23 |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:ctc:serie2:dises1057&r=cta |
| By: | Federico Etro |
| Abstract: | I study the role of unilateral strategic contracts for firms active in markets with price competition and endogenous entry. Traditional results change substantially when the market structure is endogenous rather than exogenous. They concern 1) contracts of managerial delegation to non-profit maximizers, 2) incentive contracts in the presence of moral hazard on cost reducing activities, 3) screening contracts in case of asymmetric information on the productivity of the managers, 4) vertical contracts of franchising in case of hold-up problems and 5) tying contracts by monopolists competing also in secondary markets. Firms use always these contracts to strengthen price competition and manage to obtain positive pro?ts in spite of free entry. |
| Keywords: | Strategic delegation, Incentive contracts, Screening contracts, Franchising, Tying, Endogenous market structures |
| JEL: | L11 L13 L22 L43 |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:mib:wpaper:181&r=cta |
| By: | Tomala, Tristan; Renou, Ludovic |
| Abstract: | This paper studies a mechanism design model where the players and the designer are nodes in a communication network. The authors characterize the communication networks (directed graphs) for which, in any environment (utilities and beliefs), every incentive compatible social choice function is implementable. They show that any incentive compatible social choice function is implementable on a given communication network, in all environments with either common independent beliefs and private values or a worst outcome, if and only if the network is strongly connected and weakly 2-connected. A network is strongly connected if for each player, there exists a directed path to the designer. It is weakly 2-connected if each player is either directly connected to the designer or indirectly connected to the designer through two disjoint paths, not necessarily directed. They couple encryption techniques together with appropriate incentives to secure the transmission of each player’s private information to the designer. |
| Keywords: | Mechanism design; incentives; Bayesian equilibrium; communication networks; encryption; secure transmission |
| JEL: | C72 D82 |
| Date: | 2010–01–05 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:heccah:0926&r=cta |
| By: | Georges Dionne; Mélissa La Haye; Anne-Sophie Bergères |
| Abstract: | Our objective is to test the influence of information asymmetry between potential buyers on the premium paid for an acquisition. We analyze mergers and acquisitions as English auctions with asymmetric information. The theory of dynamic auctions with private values predicts that more informed bidders should pay a lower price for an acquisition. We test that prediction with a sample of 1,026 acquisitions in the United States between 1990 and 2007. We hypothesize that blockholders of the target’s shares are better informed than other bidders because they possess privileged information on the target. Information asymmetry between participants is shown to influence the premium paid. Blockholders pay a much lower conditional premium than do other buyers (around 70% lower). Tests also show that the characteristics of the target, specifically the runup, sales growth and size, affect the premium. The size of the target relative to the buyer, the choice of a public takeover bid and the hostility of the bid are also influential. |
| Keywords: | Asymmetric information, merger and acquisition, blockholder, premium, English auction, test for over-identifying restriction (Sargan test), test for endogeneity (Durbin-Wu-Hausman test) |
| JEL: | C33 D81 G34 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:lvl:lacicr:1015&r=cta |
| By: | Dirk Bergemann (Cowles Foundation, Yale University); Maher Said (Microsoft Research New England & Olin Business School, Washington University in St. Louis) |
| Abstract: | We survey the recent literature on designing auctions and mechanisms for dynamic settings. Two settings are considered: those with a dynamic population of agents or buyers whose private information remains fixed throughout time; and those with a fixed population of agents or buyers whose private information changes across time. Within each of these settings, we discuss both efficient (welfare-maximizing) and optimal (revenue-maximizing) mechanisms. |
| Keywords: | Dynamic auctions and mechanisms, Random arrivals and departures, Changing private information, Incentive compatibility |
| JEL: | C73 D43 D44 D82 D83 |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:1757&r=cta |
| By: | Berliant, Marcus; Kung, Fan-chin |
| Abstract: | The empirical literature has found evidence of locational sorting of workers by wage or skill. We show that such sorting can be driven by asymmetric information in the labor market, specifically when firms do not know if a particular worker is of high or low skill. In a model with two types and two regions, workers of different skill levels are offered separating contracts in equilibrium. When mobile low skill worker population rises or there is technological change that favors high skilled workers, integration of both types of workers in the same region at equilibrium becomes unstable, whereas sorting of worker types into different regions in equilibrium remains stable. The instability of integrated equilibria results from firms, in the region to which workers are perturbed, offering attractive contracts to low skill workers when there is a mixture of workers in the region of origin. |
| Keywords: | Adverse Selection; Stratification |
| JEL: | R13 D82 R12 |
| Date: | 2010–03–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:21395&r=cta |
| By: | Marcel Boyer (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X, Université de Montréal); Donatella Porrini (Universita del Salento - Facolta di Economia) |
| Abstract: | We focus in this paper on the effects of court errors on the optimal sharing of liability between firms and financiers, as an environmental policy instrument. Using a structural model of the interactions between firms, financial institutions, governments and courts we show, through numerical simulations, the distortions in liability sharing between firms and financiers that the imperfect implementation of government policies implies. We consider in particular the role played by the efficiency of the courts in avoiding Type I (finding an innocent firm guilty of inappropriate care) and Type II (finding a guilty firm innocent of inappropriate care) errors. This role is considered in a context where liability sharing is already distorted (when compared with first best values) due not only to the courts' own imperfect assessment of safety care levels exerted by firm but also to the presence of moral hazard and adverse selection in financial contracting, as well as of noncongruence of objectives between firms and financiers on the one hand and social welfare maximization on the other. Our results indicate that an increase in the efficiency of the court system in avoiding errors raises safety care levels, thereby reducing the probability of accident, and allowing the social welfare maximizing government to impose a lower liability [higher] share for firms [financiers] as well as a lower standard level of care. |
| Keywords: | Environmental Policy, Court Efficiency, Liability Sharing, Regulation, Incomplete Information. |
| Date: | 2010–03–15 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00463913_v1&r=cta |
| By: | Oliver Board; Andreas Blume |
| Abstract: | Private information about language competence drives a wedge between the indicative meanings of messages, the sets of states indicated by those messages, and their imperative meanings, the actions induced by those messages. When sender and receiver have common interests, optimal use of an imperfectly shared language subverts both the indicative and imperative meanings of utterances: Messages convey both directly payoff relevant information and instrumental information about the sender’s language competence. Furthermore the actions induced by messages depend on the receiver’s uncertain ability to decode them. With conflict of interest, an imperfectly shared language can substitute for mediated communication. |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:pit:wpaper:390&r=cta |
| By: | Hitoshi Matsushima (Faculty of Economics, University of Tokyo) |
| Abstract: | We investigate the moral hazard problem in which a principal delegates multiple tasks to multiple workers. The principal imperfectly monitors their action choices by observing the public signals that are correlated with each other through a macro shock. He divides the workers into two groups and makes them compete with each other. We show that when the number of tasks is sufficiently large, relative performance evaluation between the groups accompanied with absolute performance evaluation results in eliminating unwanted equilibria. In this case, any approximate Nash equilibrium nearly induces the first-best allocation. |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:tky:fseres:2010cf727&r=cta |
| By: | Bannier, Christina E.; Feess, Eberhard |
| Abstract: | Empirical and experimental papers find that high-powered incentives may reduce performance rather than improve it; a phenomenon referred to as choking under pressure. We show that competition for high ability workers nevertheless leads firms to offer high bonus payments, thereby deliberately accepting pressure-induced performance reductions. Bonus payments allow for a separating equilibrium in which only high ability workers choose high-powered incentive contracts. Low ability workers receive fixed payments and produce their maximum output which, however, is still below the reduced output of high ability workers. Bonus payments lead to a social loss which is increasing in the degree of competition. Our paper helps to explain why steep incentive schemes are persistent in highly-competitive industries such as investment banking, and why the observed performance sensitivity of CEO compensation is largely heterogeneous. -- |
| Keywords: | Performance-related pay,screening,choking under pressure,competition |
| JEL: | D86 J31 J33 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:fsfmwp:135&r=cta |
| By: | Selcuk, Cemil (Cardiff Business School) |
| Abstract: | We present a search-and-matching model of the housing market where potential buyers' willingness to pay is private information and sellers may become desperate as they are unable to sell. A unique steady state equilibrium exists where desperate sellers offer sizeable price cuts and sell faster. If the number of distressed sales rises then even relaxed sellers are forced to lower their prices. Buyers, on the other hand, become more selective and search longer for better deals. The model yields a theoretical density function of the time-to-sale, which is positively skewed and may be hump-shaped. These results are consistent with recent empirical findings. |
| Keywords: | housing; private information; random search; motivated sellers |
| JEL: | D39 D49 D83 |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2010/2&r=cta |
| By: | Francis, Bill; Hasan, Iftekhar; Koetter, Michael; Wu, Qiang |
| Abstract: | This paper investigates the role of corporate boards in bank loan contracting. We find that when corporate boards are more independent, both price and non-price loan terms (e.g., interest rates, collateral, covenants and performance pricing) are more favorable and syndicated loans comprise more lenders. In addition, board size, board diversity, audit committee structure and other director characteristics also influence bank loan price. However they do not consistently affect all non-price loan terms except for audit committee independence. Moreover, the impact of board independence on bank loans varies with borrower characteristics (e.g., leverage, tangibility and anti-takeover environments) and loan characteristics (e.g., loan types and loan structures). Overall, our study provides strong evidence that banks tend to recognize the benefits of board monitoring in mitigating agency risk and information risk, and reward borrowers with higher quality boards with more favorable loan contract terms. |
| Keywords: | Bank loan contracting, Boards of directors, Corporate governance, Monitoring, SOX |
| JEL: | G21 G34 |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:hit:hitcei:2009-08&r=cta |
| By: | Nicola Doni (Università degli Studi di Firenze, Dipartimento di Scienze Economiche); Domenico Menicucci (Università degli Studi di Firenze, Dipartimento di Scienze Economiche) |
| Abstract: | This paper is about a procurement auction setting, introduced in Gal-Or, Gal-Or and Dukes (2007), in which suppliers offer differentiated products and the buyer needs to decide whether to reveal or not to the suppliers the own preferences for the various products. We provide some technical remarks and complements to the analysis of Gal-Or, Gal-Or and Dukes (2007), and an extension to the case of risk averse suppliers. |
| Keywords: | Information Revelation, Logconcavity, Risk Aversion |
| JEL: | D44 D82 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:frz:wpaper:wp2010_01.rdf&r=cta |
| By: | DE LA CROIX, David (UniversitŽ catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE)); DOCQUIER, FrŽdŽric (UniversitŽ catholique de Louvain (UCL). Institut de recherches Žconomiques ( IRES)) |
| Keywords: | public good, inequality aversion, immigration policy |
| JEL: | F22 D58 D6 D7 |
| Date: | 2009–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:cor:louvco:2009053&r=cta |
| By: | Lovo, Stefano; Calcagno, Ricardo |
| Abstract: | In this paper, the authors introduce a form of pre-play communication that we call "preopening". During the preopening, players announce their tentative actions to be played in the underlying game. Announcements are made using a posting system which is subject to stochastic failures. Posted actions are publicly observable and players payo¤s only depend on the opening outcome, i.e. the action pro…le that is posted at the end of the preopening phase. We show that when the posting failures hit players idiosyncratically all equilibria of the preopening game lead to the same opening outcome that corresponds to the most "sensible" pure Nash equilibrium of the underlying game. By contrast preopening does not operate an equilibrium selection when posting failure hits players simultaneously. |
| Keywords: | Preopening; equilibrium selection; bargaining; cheap talk |
| JEL: | C72 C73 C78 G10 |
| Date: | 2010–02–16 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:heccah:0927&r=cta |