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on Contract Theory and Applications |
| By: | Siddiqi, Hammad |
| Abstract: | A unique instrument has been associated with emerging markets of India and Pakistan. We show that the instrument can be considered a market response to the information gaps in these markets. The instrument may credibly transmit information and may eliminate information gaps. Hence, the birth of the instrument is, perhaps, an example of a creative market response to information problems. |
| Keywords: | Information Asymmetry; Information Transmission; Emerging Markets; Perfect Bayesian Equilibria; Badla Finance |
| JEL: | D82 D00 G0 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:21750&r=cta |
| By: | Roc Armenter; Thomas M. Mertens |
| Abstract: | Social and private insurance schemes rely on legal action to deter fraud and tax evasion. This observation guides the authors to introduce a random state verification technology in a dynamic economy with private information. With some probability, an agent's skill level becomes known to the planner, who prescribes a punishment if the agent is caught misreporting. The authors show how deferring consumption can ease the provision of incentives. As a result, the marginal benefit may be below the marginal cost of investment in the constrained-efficient allocation, suggesting a subsidy on savings. They characterize conditions such that the intertemporal wedge is negative in finite horizon economies. In an infinite horizon economy, the authors find that the constrained-efficient allocation converges to a high level of consumption, full insurance, and no labor distortions for any probability of state verification. |
| Keywords: | Insurance ; Fraud |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:10-7&r=cta |
| By: | Bauernschuster, Stefan; Duersch, Peter; Oechssler, Jörg; Vadovic, Radovan |
| Abstract: | Sick-pay is a common provision in labor contracts. It insures workers against a sudden loss of income due to unexpected absences and helps them smooth consumption. Therefore, many governments find sick-pay socially desirable and choose to mandate its provision. But sick-pay is not without its problems. Not only it suffers from moral hazard but more importantly it is subject to a potentially serious adverse selection problem (higher sick-pay attracts sicker workers). In this paper we report results of an experiment which inquires to the extend and the severity of the adverse selection when sick-pay is voluntary versus when it is mandatory. Theoretically, mandating sick-pay may be effective in diminishing adverse selection. However, our data provide clean evidence that counteracting effects are more salient. Mandatory sick pay exacerbates moral hazard problems by changing fairness perceptions and, as a consequence, increases sick pay provision far above the mandatory levels. |
| Keywords: | sick pay; sick leave; experiment; gift exchange. |
| JEL: | C9 C7 J3 |
| Date: | 2010–03–30 |
| URL: | http://d.repec.org/n?u=RePEc:awi:wpaper:0498&r=cta |
| By: | Annalisa Luporini (Università degli Studi di Firenze, Dipartimento di Scienze Economiche); Clara Graziano (Università degli Studi di Udine) |
| Abstract: | The paper analyzes the optimal delegation and ownership structure in a setting where the owner of a firm hires a manager to run the firm and to gather information on investment projects. The initial owner has two tasks: monitoring the manager and supervising project choice. Profits depend on both tasks and optimality would require different ownership stakes. A large stake is necessary for monitoring while a small stake is necessary for not interfering with incentives for project choice. Allocating control rights over project choice to the manager can alleviate this conflict. Delegation is optimal despite dissonant preferences, if managerial private benefits are not too small. By delegating authority over project choice and by using an optimal compensation scheme, the large shareholder is able to retain full ownership of the firm and, at the same time, to provide strong incentives to the manager. However, full ownership comes at the price of distorting monitoring and the resulting firing policy. Severance pay plays a key role in the optimal compensation scheme. We interpret delegation as the choice of a dual-board structure where the supervisory board is in charge of monitoring and management board is in charge of project selection. |
| Keywords: | Large Shareholder, Concentrated Ownership, Delegation, Monitoring, Board of directors, Corporate Governance. |
| JEL: | G34 L22 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:frz:wpaper:wp2010_05.rdf&r=cta |
| By: | Mele, Antonio |
| Abstract: | This paper shows how to solve dynamic agency models by extending recursive Lagrangean techniques a la Marcet and Marimon (2009) to problems with hidden actions. The method has many advantages with respect to promised utilities approach (Abreu, Pearce and Stacchetti (1990)): it is a significant improvement in terms of simplicity, tractability and computational speed. Solutions can be easily computed for hidden actions models with several endogenous state variables and several agents, while the promised utilities approach becomes extremely difficult and computationally intensive even with just one state variable or two agents. Several numerical examples illustrate how this methodology outperforms the standard approach. |
| Keywords: | repeated moral hazard; recursive Lagrangean; collocation method |
| JEL: | D86 C63 D82 C61 |
| Date: | 2010–03–29 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:21741&r=cta |
| By: | Mourad Afif; Sandrine Spaeter |
| Abstract: | In this paper, we focus on the adverse selection issue that prevails in an economy when the regulator is not able to observe the type of the abate- ment costs of the firms. The regulator decides the total level of emission that minimizes the total social cost and he sells them to the firms at some di¤erentiated prices. When firms can hide their type relative to their true abatement costs, prices must not only minimize the social cost of the envir- onmental policy. They must also induce the firms to reveal their true type. A striking point of our model is that there is no participation constraint for firms are compelled to be actors of the environmental policy. Another original result concerns the rent, which still benefits to low-cost types, but which appears to be a fee paid by high-cost types. |
| Keywords: | Regulation; adverse selection; emission permits; abatement costs; price differentiation. |
| JEL: | D82 H23 Q52 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:ulp:sbbeta:2010-07&r=cta |
| By: | Takashi Kunimoto (McGill University and CIREQ); Roberto Serrano (Brown University and IMDEA Ciencias Sociales) |
| Abstract: | We assess the strength of the different conditions identified in the literature of robust mechanism design. We focus on three conditions: ex post incentive compatibility, robust monotonicity, and robust measurability. Ex post incentive compatibility has been shown to be necessary for any concept of robust implementation, while robust monotonicity and robust measurability have been shown to be necessary for robust (full) exact and virtual implementation, respectively. This paper shows that while violations of ex post incentive compatibility and robust monotonicity do not easily go away, we identify a mild condition on environments in which robust measurability is satisfied by all social choice functions over an open and dense subset of first-order types. We conclude that there is a precise sense in which robust virtual implementation can be significantly more permissive than robust exact implementation. |
| Keywords: | robust mechanism design; ex post incentive compatibility; robust monotonicity; robust measurability |
| JEL: | C72 D78 D82 |
| Date: | 2010–03–25 |
| URL: | http://d.repec.org/n?u=RePEc:imd:wpaper:wp2010-05&r=cta |
| By: | Thomas Lim (PMA); Marie-Claire Quenez (PMA) |
| Abstract: | In this paper, we consider a financial market with assets exposed to some risks inducing jumps in the asset prices, and which can still be traded after default times. We use a default-intensity modeling approach, and address in this incomplete market context the problem of maximization of expected utility from terminal wealth for logarithmic, power and exponential utility functions. We study this problem as a stochastic control problem both under full and partial information. Our contribution consists in showing that the optimal strategy can be obtained by a direct approach for the logarithmic utility function, and the value function for the power utility function can be determined as the minimal solution of a backward stochastic differential equation. For the partial information case, we show how the problem can be divided into two problems: a filtering problem and an optimization problem. We also study the indifference pricing approach to evaluate the price of a contingent claim in an incomplete market and the information price for an agent with insider information. |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1003.6002&r=cta |
| By: | Thomas Lim (PMA - Laboratoire de Probabilités et Modèles Aléatoires - CNRS : UMR7599 - Université Pierre et Marie Curie - Paris VI - Université Paris-Diderot - Paris VII); Marie-Claire Quenez (PMA - Laboratoire de Probabilités et Modèles Aléatoires - CNRS : UMR7599 - Université Pierre et Marie Curie - Paris VI - Université Paris-Diderot - Paris VII) |
| Abstract: | In this paper, we consider a financial market with assets exposed to some risks inducing jumps in the asset prices, and which can still be traded after default times. We use a default-intensity modeling approach, and address in this incomplete market context the problem of maximization of expected utility from terminal wealth for logarithmic, power and exponential utility functions. We study this problem as a stochastic control problem both under full and partial information. Our contribution consists in showing that the optimal strategy can be obtained by a direct approach for the logarithmic utility function, and the value function for the power utility function can be determined as the minimal solution of a backward stochastic differential equation. For the partial information case, we show how the problem can be divided into two problems: a filtering problem and an optimization problem. We also study the indifference pricing approach to evaluate the price of a contingent claim in an incomplete market and the information price for an agent with insider information. |
| Keywords: | Optimal investment, default time, default intensity, filtering, dynamic programming principle, backward stochastic differential equation, indifference price, information pricing, logarithmic utility, power utility, exponential utility. |
| Date: | 2010–03–29 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00468072_v1&r=cta |
| By: | Filippo Taddei |
| Abstract: | This paper shows that private information may be crucial in explaining the relationship between liquidity, investment and economic fluctuations. First, it defines liquidity in a way that is clearly connected to investment and output. Second, it models economies where privately informed entrepreneurs issue debt to fund their investment opportunities and identifies a theoretically based, empirically usable, and macroeconomic relevant measure of liquidity of the economy: the cross-firm dispersion in debt yields. Finally, it rationalizes one novel stylized fact regarding the US corporate bond market: the positive relationship between the proposed meaure of liquidity - the cross-firm dispersion in the "yields to maturity" on newly issued publicly traded debt - and subsequent aggregate economic activity. |
| Keywords: | Liquidity; private information; robust pooling equilibrium; bond yield |
| JEL: | E2 E3 G14 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:cca:wpaper:138&r=cta |
| By: | Jean Tirole |
| Abstract: | The recent crisis was characterized by massive illiquidity. This paper reviews what we know and don't know about illiquidity and all its friends: market freezes, fire sales, contagion, and ultimately insolvencies and bailouts. It first explains why liquidity cannot easily be apprehended through a single statistics, and asks whether liquidity should be regulated given that a capital adequacy requirement is already in place. The paper then analyzes market breakdowns due to either adverse selection or shortages of financial muscle, and explains why such breakdowns are endogenous to balance sheet choices and to information acquisition. It then looks at what economics can contribute to the debate on systemic risk and its containment. Finally, the paper takes a macroeconomic perspective, discusses shortages of aggregate liquidity and analyses how market value accounting and capital adequacy should react to asset prices. It concludes with a topical form of liquidity provision, monetary bailouts and recapitalizations, and analyses optimal combinations thereof; it stresses the need for macro-prudential policies. |
| Keywords: | liquidity, contagion, bailouts, regulation |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:303&r=cta |