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on Contract Theory and Applications |
| By: | Thomas Rieck |
| Abstract: | It is commonly assumed in private value auctions that bidders have no information about the realization of the other bidders' valuations. Nevertheless, an informative public signal about the realization may be released by a bidder while he learns his own valuation. Using a simple discrete asymmetric first-price auction setting, we show that a bidder may indeed benefit from the presence of an informative signal about his own valuation. We characterize the optimal signal and show that a signal is not beneficial if it is too precise. The latter result carries over to a general continuous asymmetric first-price auction model. Finally, we use a specific signaling structure with uniform distributions to show that signaling need not be beneficial for any precision of the signal. |
| Keywords: | asymmetric auction, first-price auction, signaling |
| JEL: | D44 D82 |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:bon:bonedp:bgse18_2010&r=cta |
| By: | Li, Gan; Wen-Yao, Wang |
| Abstract: | Abstract: Countries with deposit insurances differ significantly on how much protection their insurance provides. We study the optimal coverage limit in a model of deposit insurance with capital requirements and risk sensitive premia to prevent moral hazard. Depositors have incentives to monitor the bank’s risk taking behavior, thus threatening banks with withdrawals of deposits if necessary. We find that either banking regulations or market discipline is insufficient to reduce bank’s risk. In addition, our numerical example explains the differences in coverage cross countries which agrees with empirical evidence. We show that low income countries provide more generous insurance protection than higher income countries. |
| Keywords: | Depositor’s monitoring; moral hazard; optimal coverage; partial deposit insurance. |
| JEL: | E65 G28 G21 |
| Date: | 2010–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:25798&r=cta |
| By: | Kfir Eliaz (Brown University); Roberto Serrano (Brown University and IMDEA Social Sciences Institute) |
| Abstract: | Consider the problem of information disclosure for a planner who faces two agents interacting in a state-dependent multi-action prisoners' dilemma. We find conditions under which the planner can make use of his superior information by disclosing some of it to the agents, and conditions under which such information leakage is not possible. Although the problem is entirely symmetric, the planner's only way to reveal part of the information is based on creating asymmetries between the two agents by giving them different pieces of information. We also find conditions under which such partially informative equilibria are the planner's best equilibria. |
| Keywords: | Information disclosure; generalized prisoners' dilemma; uninformative equilibria; partially or fully informative equilibria |
| JEL: | C72 D82 D83 |
| Date: | 2010–10–12 |
| URL: | http://d.repec.org/n?u=RePEc:imd:wpaper:wp2010-20&r=cta |
| By: | Anna Zaharieva (Chizhova) (Department of Economics, University of Konstanz, Germany) |
| Abstract: | This paper considers job separations in a search model with labour market matching and moral hazard. Both workers and firms value productive matches and take actions to increase match stability: firms offer a share of match surplus to provide workers with correct incentives and workers take hidden actions (effort) negatively affecting the match separation rate. Heterogeneous productivity draws combined with the moral hazard problem give rise to match-specific endogenous separation rates. Additionally a counteraction of two effects - match stability and match scarcity - explains an observed asymmetric shape of a wage probability density function with a unique interior mode on the support. |
| Keywords: | Matching, separation rate, job stability, effort, wage density |
| JEL: | J31 J63 J64 M52 |
| Date: | 2010–10–11 |
| URL: | http://d.repec.org/n?u=RePEc:knz:dpteco:1006&r=cta |
| By: | Daron Acemoglu; Alp Simsek |
| Date: | 2010–10–08 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levarc:661465000000000232&r=cta |
| By: | Amihai Glazer (Department of Economics, University of California-Irvine); Hiroki Kondo (Department of Economics, Sophia University) |
| Abstract: | An altruistic agent who may aid a person with a low income may cause that person to exert little eort to increase his income. Such behavior generates a Dilemma, in which welfare is lower than when no one is altruistic. We show how governmental transfers, which do not allow for reallocation from a person who saves much to one who saves little, reduces the eect, and can lead to an outcome which is Pareto-superior to the outcome under a Nash equilibrium with no government taxation and transfers. |
| Keywords: | Social security; Moral hazard; Savings; Altruism |
| JEL: | D13 D64 D91 |
| Date: | 2010–10 |
| URL: | http://d.repec.org/n?u=RePEc:irv:wpaper:101102&r=cta |
| By: | Thomas Rieck |
| Abstract: | In innovation contests, the progress of the competing firms in the innovation process is usually their private information. We analyze an innovation contest in which research firms have a stochastic technology to develop innovations at a fixed cost, but their progress is publicly announced. We make a comparison with the case of no information revelation: if the progress is disclosed, the expected profit of the firms is higher, but the expected profit of the sponsor is lower. Additionally, we show that firms may voluntarily reveal their information. |
| Keywords: | contest, innovation, information revelation |
| JEL: | O32 D82 D72 |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:bon:bonedp:bgse16_2010&r=cta |
| By: | Tommaso Gabrieli (Department of Economics, City University, London) |
| Abstract: | Large empirical evidence shows that the difference in the political support for redistribution appears to reflect a difference in the social perceptions regarding the determinants of individual wealth and the underlying sources of income inequality. This paper presents a model of beliefs and redistribution which explains this evidence through multiple politico-economic equilibria. Differently from the recent literature which obtains multiple equilibria by modeling agents characterized by psychological biases, my model is based on standard assumptions. Multiple equilibria originate from multiple optimal levels of information for the society. Multiple optimal levels of information exist because increasing the informativeness of an economy produces a trade-off between a decrease in adverse selection and an increase in moral hazard. The framework allows to analyze various comparative statics in order to answer to policy questions. |
| Keywords: | Politico-Economic Equilibria, Redistribution, Incomplete Information |
| JEL: | D31 D72 D80 E62 H30 O40 |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:cty:dpaper:1004&r=cta |
| By: | Paolo Colla (Università Bocconi); José M. Marín (IMDEA Social Sciences Institute) |
| Abstract: | Our basic premise is that fund managers performance is related to superior information about an asset payoff. We investigate the relationship between managerial skills and trading behavior within a two-period rational expectation equilibrium (REE) model where agents trade on private information in the first round, while a public signal arrives at the second date that makes traders revise their beliefs and retrade. The public signal can be related to the asset payoff, or to variables not related to fundamentals (noise), or both. We characterize the unique partially revealing REE and explore the drivers of price dynamics and trading behavior. Our main prediction is that good managers are contrarian traders, while bad managers are momentum traders when public news arrive to the market. Furthermore, the change in holdings of each type of trader is monotonic on the traders' skills. Based on these predictions, we propose new performance evaluation measures that rely on the manager's change in holdings around the arrival of public news rather than his past performance. A byproduct of our analysis is the proposal of a new protocol for performance evaluation and Due Diligence (DD) procedures. |
| Keywords: | REE; performance evaluation; mutual fund; hedge funds; talent; informed traders; due diligence |
| JEL: | G11 G12 G14 |
| Date: | 2010–10–18 |
| URL: | http://d.repec.org/n?u=RePEc:imd:wpaper:wp2010-21&r=cta |
| By: | Vincent Anesi (University of Nottingham) |
| Abstract: | With the changing economic circumstances confronting their countries, regionally concentrated minorities have been facing a strategic problem, important aspects of which can be stylized as a situation in which a minority leader is uncertain about the costs of secession for her community. This paper shows that this uncertainty is a central cause of secession, using a model which incorporates both policies to appease secessionist aspirations and informational asymmetries. In a situation of asymmetric information, in which the policy-maker is better informed about the consequences of separation than the minority leader, signaling incentives make secession the unique equilibrium outcome, whether mutually advantageous compromises exist or not. We also show that the ruling majority may seek to maintain political unity by pre-committing to minority protection rules which prevent bluffing by the informed policy-maker. Additionally, the model generates comparative statics results on the question of which states are most likely to adopt constitutional rules protecting the minorities living within their borders. |
| Keywords: | Constitutional commitment, secession, signaling, regional redistribution |
| JEL: | D74 D82 H77 |
| Date: | 2010–08 |
| URL: | http://d.repec.org/n?u=RePEc:cdx:dpaper:2010-15&r=cta |
| By: | Anthony J. Venables |
| Abstract: | Productivity is high in cities partly because the urban environment acts as a self-selection mechanism. If workers have imperfect information about the quality of workers with whom they match and matches take place within cities, then high-ability workers will choose to live and work in expensive cities. This self-selection improves the quality of matches in such cities. The mechanism may be reinforced by the development of informational networks in cities with a large proportion of high ability workers. As a consequence productivity in these cities is high for workers of all ability types. |
| Keywords: | economic geography, productivity, city, urban, sorting, self-selection |
| JEL: | R0 R1 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:507&r=cta |
| By: | Achille basile (Università di Napoli Federico II and CSEF); Maria Gabriella Graziano (Università di Napoli Federico II and CSEF); Maria Laura Pesce (Università di Napoli Federico II) |
| Abstract: | This paper studies the notion of fairness in pure exchange economies involving uncertainty and asymmetric information. We propose a new concept of coalitional fair allocation in order to solve the tension that may exist between efficiency and envy-freeness when the equity of allocations is evaluated at the {\it interim} stage. Some characterizations of constrained market equilibria are derived extending the analysis to economies that have both an atomic and an atomless sector. |
| Keywords: | Mixed markets, coalitional fairness, envy, efficiency, asymmetric information |
| JEL: | C71 D51 D82 |
| Date: | 2010–01–23 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:261&r=cta |
| By: | Wei Ding (University of Bonn); Cuihong Fan (Shanghai University of Finance and Economics); Elmar G. Wolfstetter (Humboldt University of Berlin) |
| Abstract: | We consider takeover bidding in a Cournot oligopoly when firms have private information concerning the synergy effect of merging with a takeover target. Two auction rules are considered: standard first-price and profit-share auctions, supplemented by entry fees. Since non-merged firms benefit from a merger if the synergies are low, bidders are subject to a positive externality. Nevertheless, pooling does not occur; and the profit-share auction is strictly more profitable than the first-price auction, regardless of whether firms observe the synergy parameter or only the winning bid before they play the oligopoly game. |
| Keywords: | Horizontal mergers, takeovers, auctions, externalities, oligopoly |
| JEL: | G34 D44 H23 L13 D43 |
| Date: | 2010–10 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:336&r=cta |
| By: | Krishnendu Ghosh Dastidar |
| Abstract: | We consider a two good world where an individual i with income mi has utility function u(x,y), where x belongs to [0,infinity) and y belongs {0,1}. We first derive the valuation (maximum price that he is willing to pay for the object) for good y as a function of his income. Then we consider the following problem. Suppose good x is available in a store at a fixed price 1. Good y can be obtained in an auction. In such a situation we show that bidding ones own valuation is an equilibrium in a second-price auction. With risk neutral bidders and high enough incomes we derive the symmetric equilibrium in first-price and all-pay auctions and show that revenue equivalence fails to hold. With risk neutrality we also show that under mild restrictions, the revenue maximising reserve price is zero for all the three auctions and the all-pay auction with zero reserve price fetches the highest expected revenue. With low enough incomes, we show that under some restrictions, bidding ones own valuation is a symmetric equilibrium even for first-price and all-pay auctions. Here also, the expected revenue is the highest with all-pay auctions. |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:dpr:wpaper:0790&r=cta |
| By: | Anna Zaharieva (Chizhova) (Department of Economics, University of Konstanz, Germany) |
| Abstract: | This paper incorporates a classical moral hazard problem with unobserved worker effort and bonus payments into a competitive search equilibrium environment with risk averse workers. The resulting framework permits an analysis of the effects of labour market competition and search frictions on individual contract setting. The paper demonstrates that the classical model of moral hazard with an ex-post wage setting regime may underestimate the optimal values of wages and bonus payments in competitive labour markets. The baseline model is extended to account for employer heterogeneity with respect to capital endowments. In the extended model, wage competition between employers serves as a source of positive correlation between wages and bonus payments reported in a number of empirical studies. |
| Keywords: | Effort, bonus, risk aversion, competitive search, equilibrium efficiency |
| JEL: | J33 J64 M52 |
| Date: | 2010–10–11 |
| URL: | http://d.repec.org/n?u=RePEc:knz:dpteco:1007&r=cta |
| By: | Glorie, K.; Oostrum, J.M. van; Dur, R.A.J.; Kazemier, G.; Wagelmans, A.P.M. |
| Abstract: | The imperative to improve healthcare efficiency is now stronger than ever. Rapidly increasing healthcare demand and the prospect of healthcare cost exploding require that measures be taken to make healthcare organizations become more efficiency-aware. Alignment of organizational interests is therefore important. One of the main hurdles to overcome is the provision of the right incentives to healthcare workers, in particular physicians. In this research we investigate the incentive system for physicians in university hospitals. We present an inquiry held in a large university hospital in the Netherlands and show that non-financial incentives receive significantly more support among physicians than financial incentives. Over 95 percent of the physicians indicated they derive more work stimulus from research possibilities or scientific status than from wage. Over 80 percent of the physicians also indicated they prefer to be able to do more research. We therefore identified a broad class of non-financial incentives aimed at physicians in university hospitals: research facilities. The main tradeoff in using research facilities within an incentive system is between efficient resource utilization and inducement effects. This thesis constructs a principal-multi-agent model where agents engage in both care and research and which includes heterogeneity and private information. We study how research facilities incentives can be used to improve hospital performance if the current wage system is left intact. We show that research facilities are optimally used as incentives for both care and research activities, and that the hospital offers different contracts depending on physician ability and valuation. Moreover, if physicians need to reveal their valuations for research facilities, the hospital finds it optimal to allow physicians to make a rent. We discuss some implications of extending the theoretical results to practice. |
| Keywords: | health care management;incentive contracts;mechanism design;principal agent problem |
| Date: | 2010–10–12 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:eureir:1765020967&r=cta |
| By: | Masaki Aoyagi |
| Abstract: | This paper studies the problem of a monopolist who sells a network good through a price posting scheme. The scheme posts a price of every possible allocation for each buyer, who are then asked to report their private information to the seller. The seller then implements the allocation based on the reports. The social choice functions that are ex post implementable through such a sales scheme are characterized, and the conditions are identified under which the revenue maximizing scheme has the property that the price of a larger network is more affordable than that of a smaller network. |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:dpr:wpaper:0794&r=cta |
| By: | Frank Milne (Queen's University); Lynnette Purda (Queen's University); Anita Anand (University of Toronto) |
| Abstract: | Berle and Means’s analysis of the corporation—in particular, their view that those in control are not the owners of the corporation—raises questions about actions that corporations take to counter concerns regarding management’s influence. What mechanisms, if any, do corporations implement to balance the distribution of power in the corporation? To address this question, we analyze boards of directors’ propensity to voluntarily adopt recommended corporate governance practices. Because board independence is one way to enhance shareholders’ ability to monitor management, we probe whether firms with independent boards of directors (which we define as boards with either an independent chair or a majority of independent directors) are more likely than firms without independent boards to adopt these practices. We focus on boards’ willingness to monitor their firms’ agents, examining the relationship between board independence and the voluntary adoption of corporate governance guidelines. |
| Keywords: | Corporate Governance, Agency Costs, Monitoring, Independent Boards |
| JEL: | D G K L |
| Date: | 2010–10 |
| URL: | http://d.repec.org/n?u=RePEc:qed:wpaper:1243&r=cta |
| By: | George J. Mailath (Department of Economics, University of Pennsylvania); Ernst-Ludwig von Thadden (Department of Economics, University of Mannheim) |
| Abstract: | This note provides several generalizations of Mailath's (1987) result that incentive compatibility plus separation implies differentiability. The new results extend the theory to classic models in finance such as Leland and Pyle (1977), Glosten (1989), and De Marzo and Duffie (1999), that were not previously covered. |
| Keywords: | Adverse selection, separation, differentiable strategies, incentive-compatibility |
| JEL: | C60 C73 D82 D83 G14 |
| Date: | 2010–10–02 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:10-032&r=cta |
| By: | Andrzej Kwiatkowski |
| Abstract: | In this paper we study a model where non-cooperative agents may exchange knowledge in a competitive environment. As a potential factor that could induce the knowledge disclosure between humans we consider the timing of the moves of players. We develop a simple model of a multistage game in which there are only three players and competition takes place only within two stages. Players can share their private knowledge with their opponents and the knowledge is modelled as influencing their marginal cost of effort. We identify two main mechanisms that work towards knowledge disclosure. One of them is that before the actual competition starts, the stronger player of the first stage of a game may have desire to share his knowledge with the "observer", because this reduces the valuation of the prize of the weaker player of that stage and as a result his effort level and probability of winning in a fight. Another mechanism is that the "observer" may have sometimes desire to share knowledge with the weaker player of the first stage, because in this way, by increasing his probability of winning in that stage, he decreases the probability of winning of the stronger player. As a result, in the second stage the "observer" may have greater chances to meet the weaker player rather than the stronger one. |
| Keywords: | knowledge sharing, strategic knowledge disclosure, multistage contest game, non-cooperative games |
| JEL: | C72 D83 |
| Date: | 2010–10 |
| URL: | http://d.repec.org/n?u=RePEc:dun:dpaper:243&r=cta |
| By: | Hansen, Stephen (Universitat Pompeu Fabra); McMahon, Michael (University of Warwick) |
| Abstract: | We test whether outside experts have information not available to insiders by using the voting record of the Bank of England's Monetary Policy Committee. Members with more private information should vote more often against conventional wisdom, which we measure as the average belief of market economists about future interest rates. We nd evidence that external members indeed have information not available to internals, but also use a quasi-natural experiment to show they may exaggerate their expertise to obtain reappointment. This implies that an optimal committee, even outside monetary policy, should potentially include outsiders, but needs to manage career concerns. |
| Keywords: | Expert Behavior ; Committees ; Monetary Policy JEL Classification: D70 ; E52 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:warwec:946&r=cta |
| By: | Stephen Eliot Hansen; Michael McMahon |
| Abstract: | We test whether outside experts have information not available to insiders by using the voting record of the Bank of England's Monetary Policy Committee. Members with more private information should vote more often against conventional wisdom, which we measure as the average belief of market economists about future interest rates. We find evidence that external members indeed have information not available to internals, but also use a quasi-natural experiment to show they may exaggerate their expertise to obtain reappointment. This implies that an optimal committee, even outside monetary policy, should potentially include outsiders, but needs to manage career concerns. |
| Keywords: | Expert Behavior, Committees, Monetary Policy. |
| JEL: | D70 E52 |
| Date: | 2010–10 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1238&r=cta |
| By: | Daron Acemoglu; Kostas Bimpikis; Asuman E, Ozdaglar |
| Date: | 2010–10–08 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levarc:661465000000000216&r=cta |