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on Contract Theory and Applications |
| By: | Marco Celentani; Rosa Loveira; Pablo Ruiz-Verdú |
| Abstract: | We propose a model of delegated expertise designed to analyze executive compensation. An expert has to pick one of two possible decisions. By exerting effort the expert can obtain private information on these decisions. The expert’s decision and its ultimate performance realization are publicly observed, but the expert’s information is not. In other words, the principal observes the expert’s decision and its realization, but does not know whether the expert expended effort to obtain information and whether he made an efficient decision conditional on the information he received. We characterize the optimal compensation contract among those that give the expert incentives to obtain information to determine the efficient decision and to make the decision that is efficient contingent on the obtained information. We show that: 1) It is generically optimal to make pay contingent on the decision made by the expert, not only on performance; 2) The expert is often rewarded for choosing alternatives that are ex-ante inefficient. 3) When decisions differ in their complexity, optimal pay-performance may be zero if the expert chooses the complex alternative. Our model highlights novel factors that should be considered in the design of executive compensation contracts, sheds light on existing compensation practices, such as rewarding executives for acquisitions, and suggests mechanisms to promote managerial innovation. |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:fda:fdaddt:2010-29&r=cta |
| By: | M. Magnani |
| Abstract: | The present paper analyzes a general class of first-price all-pay auctions where two players have different "bidding technologies" and one bidder has a head start advantage over his/her opponent. Equilibria are characterized for the complete information setting and for the case where there is incomplete asymmetrical information. In particular, the handicapped player is uncertain about the size of the opponent’s advantage. |
| Keywords: | All-pay auctions and Auction theory and Games with asymmetrical players and Incomplete information games |
| JEL: | C72 D44 D81 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:par:dipeco:2010-ep06&r=cta |
| By: | John Duffy; Felix Munoz-Garcia (School of Economic Sciences, Washington State University) |
| Abstract: | This paper investigates incomplete information and signaling about players?inequity aversion in the simultaneous and sequential-move prisoner?s dilemma game. We ?first evaluate the role of incomplete information according to: (1) whether uncertainty helps select the effcient equilibrium outcome, and (2) whether more cooperation can be sustained under incomplete than under complete information. We then examine the possibility of information transmission among individuals in a signaling game. A separating equilibrium can be supported in which players with high concerns about fairness bear the cost of cooperating in order to reveal their type to opponents, thus promoting cooperation in subsequent periods. We also fi?nd a pooling equilibrium in which a player unconcerned about inequity aversion initially cooperates in order to mislead the uninformed player. This misleading strategy induces cooperation from the uninformed player in the subsequent stage of the game, moment at which the unconcerned player takes the opportunity to defect. This "?backstabbing?" equilibrium helps explain frequently observed behavior in ?finitely-repeated experiments. |
| Keywords: | Prisoner?s Dilemma; Inequity aversion; Incomplete Information; Signaling |
| JEL: | C72 C73 D82 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:wsu:wpaper:munoz-8&r=cta |
| By: | Ana Espinola-Arredondo; Felix Munoz-Garcia (School of Economic Sciences, Washington State University) |
| Abstract: | This paper investigates the role of uncertainty as a tool to support cooperation in international environmental agreements. We consider two layers of uncertainty. Under unilateral uncertainty treaties become successful with positive probability in the signaling game, even under parameter conditions for which no agreement is reached under complete information. Under bilateral uncertainty, a separating equilibrium emerges where the leader participates in the treaty only when its environmental concerns are high. We show that the agreement is signed for larger sets of parameter values under unilateral uncertainty. We then show that further layers of uncertainty might enhance social welfare. |
| Keywords: | Signaling games; Unilaterial uncertainty; Bilateral uncertainty; Non-binding negotiations |
| JEL: | C72 D62 Q28 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:wsu:wpaper:espinola-7&r=cta |
| By: | Alberto Martin |
| Abstract: | We analyze a standard environment of adverse selection in credit markets. In our environment, entrepreneurs who are privately informed about the quality of their projects need to borrow in order to invest. Conventional wisdom says that, in this class of economies, the competitive equilibrium is typically inefficient. We show that this conventional wisdom rests on one implicit assumption: entrepreneurs can only access monitored lending. If a new set of markets is added to provide entrepreneurs with additional funds, efficiency can be attained in equilibrium. An important characteristic of these additional markets is that lending in them must be unmonitored, in the sense that it does not condition total borrowing or investment by entrepreneurs. This makes it possible to attain efficiency by pooling all entrepreneurs in the new markets while separating them in the markets for monitored loans. |
| Keywords: | Adverse Selection, Credit Markets, Collateral, Monitored Lending, Screening |
| JEL: | D82 G20 D62 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1257&r=cta |
| 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) the possibility that the principal might reverse her initial action after receiving an interim news. In this model, the principal's decisions 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 eff ect on the expert's recommendation. We also discuss the implication of the results for possible delegation of decision making to another person with di fferent preference parameters. |
| Keywords: | Signaling Game; Reputational Cheaptalk; Career Concerns |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:syd:wpaper:2123/7115&r=cta |
| By: | Corrado Benassi (Dipartimento di Scienze Economiche, Alma Mater Studiorum - Università di Bologna; The Rimini Centre for Economic Analysis) |
| Abstract: | The first order approach to solving the standard one-dimensional principal-agent model is conditional upon the relevant stochastic production function obeying two noteworthy restrictions: that the Likelihood Ratio be monotonically increasing in output, and that the distribution function be convex in effort. It is usually claimed that such conditions are very restrictive, as very few of the standard probability distributions satisfy both properties. The purpose of this note is to show that this lack of generality should not be seen as a problem, since some simple convexifying transformations are available that enable one to work with proper distributions with the required properties. |
| Keywords: | Principal agent problem, first order approach |
| JEL: | D86 |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:rim:rimwps:06_11&r=cta |
| By: | Guido Candela (Department of Economics, University of Bologna, Italy; The Rimini Centre for Economic Analysis (RCEA), Italy); Massimiliano Castellani (Department of Economics, University of Bologna, Italy; The Rimini Centre for Economic Analysis (RCEA), Italy); Pierpaolo Pattitoni (Faculty of Economics, University of Bologna, Italy) |
| Abstract: | Does a form of socially relevant conspicuous consumption segment the Tribal Art market? In this paper, we address this question presenting a model based on the signaling theory and we test this model empirically using a unique hand-collected dataset, which comprises the worldwide Tribal Art market auctions between 1999 and 2008. Our results show a significant relationship among the probability of an artwork to be sold and several signs and signals. The effect of prices on the probability of sales is nonlinear, and allows us to segment the Tribal art market in a price-driven and a conspicuous consumption-driven market. |
| Keywords: | Tribal art, Conspicuous Consumption, Signs, Signals |
| JEL: | Z11 C25 |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:rim:rimwps:02_11&r=cta |