|
on Contract Theory and Applications |
| By: | Bertola, Giuseppe (University of Turin); Koeniger, Winfried (Queen Mary, University of London) |
| Abstract: | We characterize how public insurance schemes are constrained by hidden financial transactions. When non-exclusive private insurance entails increasing unit transaction costs, public transfers are only partly offset by hidden private transactions, and can influence consumption allocation. We show that efficient transfer schemes should take into account the impact of insurance on unobservable effort and saving choices as well as the relative cost of public and private insurance technologies. We provide suggestive evidence for the empirical relevance of these results by inspecting the cross-country relationship between available indicators of insurance transaction costs and variation in public and private insurance. |
| Keywords: | public transfers, private insurance, moral hazard, transaction costs |
| JEL: | E21 D82 H21 G22 |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp5201&r=cta |
| By: | Mohamed Belhaj (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR6579); Frédéric Deroïan (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR6579) |
| Abstract: | We consider a model of interdependent efforts, with linear and possibly asymmetric interaction. We examine how a variation of the intensity of interaction affects aggregate effort. We show that the relevant information is given by the transposed system. |
| Keywords: | Asymmetric Interaction, Social Network, Aggregate Effort, Transposed System |
| Date: | 2010–09–22 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00520327_v1&r=cta |
| By: | Jayanaka Wijeratne; Shino Takayama (School of Economics, The University of Queensland) |
| Abstract: | We present a model in which there is uncertainty about realization of a risky asset value for an informed trader. Then, we show that the informed trader does not trade in equi- librium if the inside information the informed trader has is not sufficiently accurate. We use the framework presented by Glosten and Milgrom (1985) and extend the assumption that the informed trader knows the terminal value of the risky asset. Finally, we obtain the conditions under which the informed trader would not trade in equilibrium. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:qld:uq2004:411&r=cta |
| By: | Hongyan Yang (Department of Economics, University of Konstanz, Germany) |
| Abstract: | This paper employs a two-period life-cycle model to derive the optimal tax policy when educational investments are subject to credit constraints. Credit constraints arise from the limited commitment of debitors to repay loans and are endogenously determined by private banks under the non-default condition that individuals can-not be better off by defaulting. We show that the optimal redistributive taxation trades the welfare gain of reducing borrowing demand and of changing the credit constraints against the efficiency costs of distorting education and labor supply. In addition, we compare the optimal taxation with that when credit constraints are taken as given. If income taxation decreases (increases) the borrowing limit, taking credit constraints as given leads to a too high (low) labor tax rate. Thus, ignoring the effects of tax policy on credit constraints overestimates (underestimates) the welfare effects of income taxation. Numerical examples show that income taxation tightens the credit constraints and the optimal tax rates are lower when credit constrains are endogenized. The intuition is that redistributive taxation reduces the incentive to invest in education and to work, thus exaggerating the moral hazard problems associated with credit constraints. |
| Keywords: | labor taxation, human capital investment, credit constraints |
| JEL: | H21 I2 J2 |
| Date: | 2010–09–30 |
| URL: | http://d.repec.org/n?u=RePEc:knz:dpteco:1004&r=cta |
| By: | Volker Hahn (CER-ETH - Center of Economic Research at ETH Zurich, Switzerland) |
| Abstract: | We introduce the notion of verifiable information into a model of sequential debate among experts who are motivated by career concerns. We show that self-censorship may hamper the efficiency of information aggregation, as experts withhold evidence contradicting the conventional wisdom. In this case, silence is telling and undermines the prevailing view over time if this view is incorrect. As a result, withholding arguments about the correct state of the world is only a temporary phenomenon, and the probability of the correct state of the world being revealed always converges to one as the group of experts becomes large. For small groups, a simple mechanism the principal can use to improve decisionmaking is to appoint a devil’s advocate. |
| Keywords: | experts, committees, career concerns, verifiable information, information aggregation |
| JEL: | D71 D82 |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:eth:wpswif:10-136&r=cta |
| By: | Jonathan Carroll; Shino Takayama (School of Economics, The University of Queensland) |
| Abstract: | This paper develops a hierarchical agency model of deposit insurance. The main purpose is to undertake a game theoretic analysis of the consequences of deposit insurance schemes and their effects on monitoring incentives for banks. Using this simple framework, we analyze both risk- independent and risk-dependent premium schemes along with reserve requirement constraints. The results provide policymakers with not only a better understanding of the effects of deposit insurance on welfare and the problem of moral hazard, but also the policy implications implied in the design of de- posit insurance schemes. Our finding is consistent with the empirical research on depositor discipline. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:qld:uq2004:410&r=cta |
| By: | Subhasish Dugar (Department of Economics, University of Calgary); Quazi Shahriar (Department of Economics, San Diego State University) |
| Abstract: | We examine, experimentally, how real group identities of parties (principal and agent), contemplating to form a partnership while facing a moral hazard problem (as treated in the contract theory), may attenuate the problem and thereby implement the socially desirable efficient outcome. We find that when both parties share the same real group identity, the proportion of play of the efficient outcome is significantly higher than when the parties share two different real group identities. However, when we induce a substantially weaker form of group identity or increase the saliency of the outside-option payoff of the principal, the incidence of play of the efficient outcome diminishes considerably, even when the parties’ identities align perfectly. Our results have important implications for organizational design. |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:sds:wpaper:0036&r=cta |
| By: | Hellerstein, Daniel; Higgins, Nathaniel |
| Abstract: | Conservation programs faced with limited budgets often use a competitive enrollment mechanism. Goals of enrollment might include minimizing program expenditures, encouraging broad participation, and inducing adoption of enhanced environmental practices. We use experimental methods to evaluate an auction mechanism that incorporates bid maximums and quality adjustments. We examine this mechanism’s performance characteristics when opportunity costs are heterogeneous across potential participants, and when costs are only approximately known by the purchaser. We find that overly stringent maximums can increase overall expenditures, and that when quality of offers is important, substantial increases in offer maximums can yield a better quality-adjusted result. |
| Keywords: | conservation auctions; Conservation Reserve Program; CRP; bid caps; experimental economics |
| JEL: | D44 C91 Q58 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:25268&r=cta |
| By: | David Hugh-Jones (Max Planck Institute of Economics, Jena); David Reinstein (Department of Economics at Essex University) |
| Abstract: | When person A makes an offer to person B and B rejects it, then A may "lose face". This loss of face is assumed to occur only if B knows for sure of A's offer. While under some circumstances loss of face can be rationalized by the consequences for future reputation, it may also enter directly into the utility function. Loss of face concerns can lead to fewer offers and inefficiency in markets that involve matching, discrete transactions, and offers/proposals in both directions, such as the marriage market, certain types of labor markets, admissions to colleges and universities, and joint ventures and collaborations. We offer a simple model of this, and show that under some circumstances welfare can be improved by a mechanism that only reveals offers when both parties say "yes". |
| Keywords: | Matching, marriage markets, anonymity, reputation, adverse selection, Bayesian games, emotions. |
| JEL: | D83 |
| Date: | 2010–09–29 |
| URL: | http://d.repec.org/n?u=RePEc:jrp:jrpwrp:2010-068&r=cta |
| By: | Uday Bhanu Sinha |
| Abstract: | The paper deals with the issue of information sharing in a Cournot duopoly by an innovating firm in the face of a merger with its rival. The innovating firm would share information about the cost realization with its rival provided the market size is relatively small or, the R&D technology is relatively more efficient in a medium market size. However, in a large market, or in a medium market size with less efficient R&D technology, the innovating firm does not share information with its rival. They also show that the social welfare may be higher under incomplete information regime. [Working Paper No. 145] |
| Keywords: | Information sharing, market size, R&D, merger and welfare |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:ess:wpaper:id:2908&r=cta |
| By: | Inci, Eren; Barlo, Mehmet |
| Abstract: | If control of their firms allows entrepreneurs to derive private benefits, it also allows other controlling parties. Private benefits are especially relevant for venture capitalists, who typically get considerable control in their portfolio firms, but not for banks, which are passive loan providers. We incorporate this difference between banks and venture capital and analyze entrepreneurs' financing strategy between the two. We find that, in all strict Nash Equilibria, entrepreneurs who value private benefits more choose banks while the rest choose venture capital. Thus, bank-financed entrepreneurs allocate more resources to tasks that yield private benefits while VC-backed entrepreneurs have higher profitability. |
| Keywords: | bank; control; entrepreneurship; private benefit; venture capital |
| JEL: | L26 G32 G24 M13 G21 |
| Date: | 2010–07–27 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:25566&r=cta |
| By: | Gani Aldashev; Timoteo Carletti; Simone Righi |
| Abstract: | We study the informational efficiency of a market with a single traded asset. The price initially differs from the fundamental value, about which the agents have noisy private information (which is, on average, correct). A fraction of traders revise their price expectations in each period. The price at which the asset is traded is public information. The agents' expectations have an adaptive component and a social-interactions component with confirmatory bias. We show that, taken separately, each of the deviations from rationality worsen the information efficiency of the market. However, when the two biases are combined, the degree of informational inefficiency of the market (measured as the deviation of the long-run market price from the fundamental value of the asset) can be non-monotonic both in the weight of the adaptive component and in the degree of the confirmatory bias. For some ranges of parameters, two biases tend to mitigate each other's effect, thus increasing the informational efficiency. |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1009.5075&r=cta |
| By: | Leuven, Edwin (CREST (ENSAE)); Oosterbeek, Hessel (University of Amsterdam); van der Klaauw, Bas (VU University Amsterdam) |
| Abstract: | In this paper we investigate how heterogeneous agents choose among tournaments with different prizes. We show that if the number of agents is sufficiently small, multiple equilibria can arise. Depending on how the prize money is split over the tournaments, these may include, for example, a perfect-sorting equilibrium in which high-ability agents compete in the high-prize tournament, while low-ability agents compete for the low prize. However, there are also equilibria in which agents follow a mixed strategy and there can be reverse sorting, i.e. low-ability agents are in the tournament with the high prize, while high-ability agents are in the low-prize tournament. We show that total effort always decreases compared to a single tournament. However, splitting the tournament may increase the effort of low-ability agents. |
| Keywords: | self-selection, tournament, heterogeneous agents, social planner |
| JEL: | D02 |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp5186&r=cta |