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on Contract Theory and Applications |
| By: | Ouidad Yousfi |
| Abstract: | The current paper studies the financial structure in buyout firms under moral hazard due to unobservable efforts and an excessive risk-taking. The choice of the exit route may lead to agency conflicts between the entrepreneur and the LBO firm: the former may take very risky decisions to increase the probability of IPO exit. If the target is taking public, he gets a non transferable and private benefit. The opportunistic behavior of the entrepreneur decreases the probability of sale exit; the preferred exit route of the LBO firm. Without moral hazard, there are many ways to finance the project and the two agents exert strictly positive efforts. With moral hazard, the entrepreneur, the LBO firm and the bank must finance jointly the buyout. Financing the project through standard debt-equity contracts does not implement the first-best solution. Only a set of projects can be financed through both the LBO fund and the bank at the macroeconomic level. If the entrepreneur is not wealthy enough, her project is not undertaken |
| Keywords: | LBO, moral hazard, excessive taking risk, financial structure, Exits |
| JEL: | G15 G23 G32 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2010-6&r=cta |
| By: | Singh, Nirvikar |
| Abstract: | This essay provides an elementary, unified introduction to resource allocation under uncertainty in competitive markets. The coverage includes decision-making under uncertainty, measuring risk and risk aversion, insurance and asset markets, and asymmetric information. |
| Keywords: | Uncertainty; risk; risk aversion; insurance; asset markets; asymmetric information |
| JEL: | D01 D80 |
| Date: | 2010–03–22 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:21556&r=cta |
| By: | Francesca Cornelli (London Business School and CEPR); Zbigniew Kominek (European Bank for Reconstruction and Development (EBRD)); Alexander Ljungqvist (Stern School of Business, New York University, ECGI and CEPR) |
| Abstract: | We test under what circumstances boards discipline managers and whether such interventions improve performance. We exploit exogenous variation due to the staggered adoption of corporate governance laws in formerly Communist countries coupled with detailed ‘hard’ information about the board’s performance expectations and ‘soft’ information about board and CEO actions and the board’s beliefs about CEO competence in 473 mostly private-sector companies backed by private equity funds between 1993 and 2008. We find that CEOs are fired when the company underperforms relative to the board’s expectations, suggesting that boards use performance to update their beliefs. CEOs are especially likely to be fired when evidence has mounted that they are incompetent and when board power has increased following corporate governance reforms. In contrast, CEOs are not fired when performance deteriorates due to factors deemed explicitly to be beyond their control, nor are they fired for making ‘honest mistakes.’ Following forced CEO turnover, companies see performance improvements and their investors are considerably more likely to eventually sell them at a profit. |
| Keywords: | Corporate Governance, Large Shareholders, Boards of Directors, CEO Turnover, Legal Reforms, Transition Economies, Private Equity |
| JEL: | G34 G24 G32 K22 O16 P21 |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:fem:femwpa:2010.30&r=cta |
| By: | Timothy W. Guinnane; Jochen Streb |
| Abstract: | The Knappschaft underlies Bismarck’s sickness and accident insurance legislation (1883 and 1884), which in turn forms the basis of the German social-insurance system today and, indirectly, many social-insurance systems around the world. The Knappschaften were formed in the medieval period to provide sickness, accident, and death benefi ts for miners. By the mid-nineteenth century, participation in the Knappschaft was compulsory for workers in mines and related occupations, and the range and generosity of benefi ts had expanded considerably. Each Knappschaft was locally controlled and self-funded, and their admirers saw in them the ability to use local knowledge and good incentives to deliver benefi ts at low cost. This paper focuses on a problem central to any insurance system, and one that plagued the Knappschaften as they grew larger in the later nineteenth century: the problem of moral hazard. Replacement pay for sick miners made it attractive, on the margin, for miners to invent or exaggerate conditions that made it impossible for them to work. Here we outline the moral hazard problem the Knappschaften faced as well as the internal mechanisms they devised to control it. We then use econometric models to demonstrate that those mechanisms were at best imperfect. |
| Keywords: | Sickness insurance; moral hazard; malingering; Knappschaft; social insurance |
| JEL: | N33 N43 H55 H53 I18 |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:rwi:repape:0163&r=cta |
| By: | Tsakas Elias; Voorneveld Mark (METEOR) |
| Abstract: | The present paper extends the standard model of pairwise communication among Bayesianagents to cases where the structure of the communication protocol is not commonly known.We show that, even under strict conditions on the structure of the protocols and the nature of the transmitted signals, a consensus may never be reached if very little asymmetric information about the protocol is introduced. |
| Keywords: | Economics (Jel: A) |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:umamet:2010016&r=cta |
| By: | Jan Heufer |
| Abstract: | It is argued that drug consumption, most commonly alcohol drinking, can be a technology to give up some control over one’s actions and words. It can be employed by trustworthy players to reveal their type. Similarly alcohol can function as a “social lubricant” and faciliate type revelation in conversations. It is shown that both separating and pooling equilibria can exist; as opposed to the classic results in the literature, a pooling equilibrium is still informative. Drugs which allow a gradual loss of control by appropriate doses and for which moderate consumption is not addictive are particularly suitable because the consumption can be easily observed and reciprocated and is unlikely to occur out of the social context. There is a tradeoff between the effi ciency gains due to the signaling eff ect and the loss of productivity associated with intoxication. Long run evolutionary equilibria of the type distribution are considered. If coordination on an exclusive technology is effi cient, social norms or laws can raise effi ciency by legalizing only one drug. |
| Keywords: | Asymmetric Information, Drinking, Drug Consumption, Signaling, Social Norms |
| JEL: | C72 D82 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:rwi:repape:0158&r=cta |
| By: | A. Fedele; A. Mantovani; F. Liucci |
| Abstract: | In this paper we consider a moral hazard problem between a creditworthy firm which needs funding and a bank. We first study under which conditions the firm does not obtain the loan. We then determine whether and how the intervention of an external financial institution can facilitate the access to credit. In particular, we focus on the European Investment Bank Group (EIBG), which provides (i) specific credit lines to help banks that finance small and medium-sized enterprises (SMEs)and (ii) guarantees for portfolios of SMEs'loans. We show that only during crises the EIBG intervention allows to totally overcome the credit crunch. |
| JEL: | D82 D21 |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:bol:bodewp:699&r=cta |
| By: | Benny Moldovanu; Aner Sela; Xianwen Shi |
| Abstract: | We study optimal contest design in situations where the designer can reward high performance agents with positive prizes and punish low performance agents with negative prizes. We link the optimal prize structure to the curvature of distribution of abilities in the population. In particular, we identify conditions under which, even if punishment is costly, punishing the bottom is more effective than rewarding the top in eliciting effort input. If punishment is costless, we study the optimal number of punishments in the contest. |
| Keywords: | Contests, All-pay auctions, Punishments, Order Statistics |
| JEL: | D44 D82 J31 J41 |
| Date: | 2010–03–25 |
| URL: | http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-399&r=cta |