nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2010‒12‒18
eighteen papers chosen by
Simona Fabrizi
Massey University, Albany
  1. Information and Incentives: The Agency Information Problem By F Gjesdal
  2. Income Fluctuations and Asymmetric Information: An Example of the Repeated Principal Agent Problem By J. Thomas; T. Worrall
  3. Randomization with Asymmetric Information By Richard Arnott; Joseph E Stiglitz
  4. Dynamic Insurance with Private Information and Balanced Budgets By Cheng Wang
  5. On Efficient Distribution with Private Information By Andrew Atkeson; Robert E Lucas
  6. Information Aggregation Through Costly Political Action By Susanne Lohmann
  7. Pareto Optima and Competitive Equilibria With Adverse Selection and Moral Hazard By Edward C Prescott; Robert M Townsend
  8. On Repeated Games with Incomplete Information Played with Non-Bayesian Players By N. Megiddo
  9. Commitment Through Incomplete Information in a Simple Repeated Bargaining Game By K. Schmidt
  10. Adverse Selection, Liquidity, and Market Breakdown By Koralai Kirabaeva
  11. Convergence of Least Squares Learning in Environments With Private Information By Albert Marcet; Tom Sargent
  12. Strategic Information Transmission By V. Crawford; J. Sobel
  13. International lending with moral hazard and risk of repudiation By Andrew Atkeson
  14. An Extension of Ausubel's Auction for Heterogeneous Discrete Goods By Hakan Inal
  15. The Impact of Court Errors on Liability Sharing and Safety Regulation for Environmental/Industrial Accidents By Marcel Boyer; Donatella Porrini
  16. Insider Trading in the Market with Rational Expected Price By Fuzhou Gong; Deqing Zhou
  17. Market Strucutre, Screening Activity and Bank Lending Behavior By Nikolaos Papanikolaou
  18. When second opinions hurt: a model of expert advice under career concerns By Liu, Yaozhou Franklin; Sanyal, Amal
  1. By: F Gjesdal
    Date: 2010–12–08
    URL: http://d.repec.org/n?u=RePEc:cla:levarc:125&r=cta
  2. By: J. Thomas; T. Worrall
    Date: 2010–12–09
    URL: http://d.repec.org/n?u=RePEc:cla:levarc:2077&r=cta
  3. By: Richard Arnott; Joseph E Stiglitz
    Date: 2010–12–08
    URL: http://d.repec.org/n?u=RePEc:cla:levarc:2054&r=cta
  4. By: Cheng Wang
    Date: 2010–12–09
    URL: http://d.repec.org/n?u=RePEc:cla:levarc:2064&r=cta
  5. By: Andrew Atkeson; Robert E Lucas
    Date: 2010–12–08
    URL: http://d.repec.org/n?u=RePEc:cla:levarc:2179&r=cta
  6. By: Susanne Lohmann
    Date: 2010–12–10
    URL: http://d.repec.org/n?u=RePEc:cla:levarc:197&r=cta
  7. By: Edward C Prescott; Robert M Townsend
    Date: 2010–12–09
    URL: http://d.repec.org/n?u=RePEc:cla:levarc:2069&r=cta
  8. By: N. Megiddo
    Date: 2010–12–09
    URL: http://d.repec.org/n?u=RePEc:cla:levarc:480&r=cta
  9. By: K. Schmidt
    Date: 2010–12–08
    URL: http://d.repec.org/n?u=RePEc:cla:levarc:605&r=cta
  10. By: Koralai Kirabaeva
    Abstract: This paper studies the interaction between adverse selection, liquidity risk and beliefs about systemic risk in determining market liquidity, asset prices and welfare. Even a small amount of adverse selection in the asset market can lead to fire-sale pricing and possibly to a market breakdown if it is accompanied by a flight-to-liquidity, a misassessment of systemic risk, or uncertainty about asset values. The ability to trade based on private information improves welfare if adverse selection does not lead to a market breakdown. Informed trading allows financial institutions to reduce idiosyncratic risks, but it exacerbates their exposure to systemic risk. Further, I show that in a market equilibrium, financial institutions overinvest into risky illiquid assets (relative to the constrained efficient allocation), which creates systemic externalities. Also, I explore possible policy responses and discuss their effectiveness.
    Keywords: Financial institutions; Financial markets; Financial stability
    JEL: G11 D82
    Date: 2010
    URL: http://d.repec.org/n?u=RePEc:bca:bocawp:10-32&r=cta
  11. By: Albert Marcet; Tom Sargent
    Date: 2010–12–09
    URL: http://d.repec.org/n?u=RePEc:cla:levarc:240&r=cta
  12. By: V. Crawford; J. Sobel
    Date: 2010–12–10
    URL: http://d.repec.org/n?u=RePEc:cla:levarc:544&r=cta
  13. By: Andrew Atkeson
    Date: 2010–12–08
    URL: http://d.repec.org/n?u=RePEc:cla:levarc:200&r=cta
  14. By: Hakan Inal (Department of Economics, VCU School of Business & Center for Public Policy, L. Douglas Wilder School of Government and Public Affairs)
    Abstract: Ausubel's dynamic private-values auction for heterogeneous discrete goods, Ausubel (2006), yields an efficient equilibrium outcome but it is designed for a limited class of environments. If bidders' values for bundles of goods are not integers, then the auction mechanism may not yield an efficient allocation without any information on bidders' values. In this paper, I extend Ausubel's auction for heterogeneous discrete goods to real-valued quasilinear utility functions. The mechanism I propose reaches a Walrasian equilibrium price vector in finite "steps" without any additional information on bidders' values. In the extension of Ausubel's auction, truthful bidding constitutes an efficient equilibrium.
    Keywords: Auctions, Ausubel auction, heterogeneous goods, discrete goods, price adjustment, tatonnement.
    JEL: D44
    Date: 2010–01
    URL: http://d.repec.org/n?u=RePEc:vcu:wpaper:1005&r=cta
  15. By: Marcel Boyer; Donatella Porrini
    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 jointly avoiding Type I (finding an innocent firm guilty of inappropriate care) and Type II (finding a guilty firm not guilty 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 firms but also to the presence of moral hazard and adverse selection in financial contracting. There is also not congruence 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 court system in avoiding errors raises safety care level, 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. <P>Nous considérons dans le présent document les effets des erreurs judiciaires sur le partage optimal des responsabilités entre entreprises et financiers, comme un instrument de politique environnementale. En utilisant un modèle structurel des interactions entre les entreprises, les institutions financières, les gouvernements et les tribunaux, nous montrons, au moyen de simulations numériques, les distorsions dans le partage de responsabilités entre entreprises et financiers qu’implique la mise en œuvre imparfaite des politiques gouvernementales. Nous considérons en particulier le rôle joué par l'efficacité des tribunaux à éviter les erreurs de type I (condamner une entreprise innocente de manquements à la sécurité) et de type II (ne pas condamner une entreprise coupable de manquements à la sécurité). Nous considérons un contexte où le partage des responsabilités est déjà altéré (par rapport à l’optimum de premier rang), en raison non seulement des difficultés des tribunaux à observer correctement les efforts de prévention des entreprises mais aussi de la présence d'aléa moral et sélection adverse dans les contrats de financement. Il n'y a pas absence de congruence entre les objectifs des entreprises et financiers d'une part et la maximisation du bien-être social d’autre part. Nos résultats indiquent qu'une plus grande efficacité du système judiciaire à éviter les erreurs entraine une hausse des activités de prévention d’accident et donc une baisse de la probabilité d'accident, et permet de réduire (d’augmenter) la part de responsabilité des entreprises (financiers) et de réduire le niveau requis de prévention.
    Keywords: Environmental Policy, Court Efficiency, Liability Sharing, Regulation, Incomplete Information, Politique environnementale, efficacité des tribunaux, partage de responsabilités, informations incomplètes
    JEL: D82 G32 K13 K32 Q28
    Date: 2010–12–01
    URL: http://d.repec.org/n?u=RePEc:cir:cirwor:2010s-48&r=cta
  16. By: Fuzhou Gong; Deqing Zhou
    Abstract: Kyle (1985) builds a pioneering and influential model, in which an insider with long-lived private information submits an optimal order in each period given the market maker's pricing rule. An inconsistency exists to some extent in the sense that the ``constant pricing rule " actually assumes an adaptive expected price with pricing rule given before insider making the decision, and the ``market efficiency" condition, however, assumes a rational expected price and implies that the pricing rule can be influenced by insider's strategy. We loosen the ``constant pricing rule " assumption by taking into account sufficiently the insider's strategy has on pricing rule. According to the characteristic of the conditional expectation of the informed profits, three different models vary with insider's attitudes regarding to risk are presented. Compared to Kyle (1985), the risk-averse insider in Model 1 can obtain larger guaranteed profits, the risk-neutral insider in Model 2 can obtain a larger ex ante expectation of total profits across all periods and the risk-seeking insider in Model 3 can obtain larger risky profits. Moreover, the limit behaviors of the three models when trading frequency approaches infinity are given, showing that Model 1 acquires a strong-form efficiency, Model 2 acquires the Kyle's (1985) continuous equilibrium, and Model 3 acquires an equilibrium with information released at an increasing speed.
    Date: 2010–12
    URL: http://d.repec.org/n?u=RePEc:arx:papers:1012.2160&r=cta
  17. By: Nikolaos Papanikolaou (Luxembourg School of Finance, University of Luxembourg)
    Abstract: In this paper we construct a theoretical model of spatial banking competition that considers the differential information among banks and potential borrowers in order to investigate how market structure affects the lending behavior of banks and their incentives to invest in screening technology. Consistent with the prevailing view in the relevant literature, our results reveal that competition reduces lending cost, which, in turn, encourages the entry of new customers in the loan market. Also, that the transportation cost that potential borrowers have to pay in order to reach the bank of their interest is decreased with the degree of competitiveness. Importantly, we demonstrate that market structure exerts a considerable positive effect on banks’ incentives to screen their loan applicants since banks are found to invest more in screening as competition in the market becomes higher. This is to say, banks resort to screening that serves as a buffer mechanism against bad credit which entails higher risk and which is more likely under competitive conditions. Overall, our findings provide support to a rather close link between the degree of competition, bank lending activity, and the investment of banks in screening technology.
    Keywords: banking; spatial competition; screening; credit risk
    JEL: G21 D41 D80
    Date: 2010
    URL: http://d.repec.org/n?u=RePEc:crf:wpaper:10-11&r=cta
  18. By: Liu, Yaozhou Franklin; Sanyal, Amal
    Abstract: We augment the standard career concerns model by introducing (i) an action that blocks the information about the true state of the world and (ii) a second opinion/interim news after the initial consultation with the expert. In this model, the principal's action as well as the expert's message endogenously determine the observability of the states and consequently, the assessment of the expert's ability by the principal. We show that having access to better interim news could reduce the welfare of the principal due to its strategic effect on the expert's recommendation. We also discuss the implication of the results for possible delegation of decision making to another person with different decision parameters.
    Keywords: Career Concern; Reputational Cheaptalk; Signaling Game
    JEL: D82 D83
    Date: 2010–12–02
    URL: http://d.repec.org/n?u=RePEc:pra:mprapa:27176&r=cta
This nep-cta issue is ©2010 by Simona Fabrizi. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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