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on Contract Theory and Applications |
| By: | Mele, Antonio |
| Abstract: | This paper shows how to solve dynamic agency models by extending recursive Lagrangean techniques à la Marcet and Marimon (2011) 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; collocation method; dynamic models with private information; recursive contracts |
| JEL: | D86 C63 C61 |
| Date: | 2011–04–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:30310&r=cta |
| By: | Martin Szydlowski |
| Abstract: | I study the optimal choice of investment projects in a continuous time moral hazard model with multitasking. While in the first best, projects are invariably chosen by the net present value (NPV) criterion, moral hazard introduces a cutoff for project execution which depends on both a project’s NPV as well as its signal to noise ratio (SN). The cutoff shifts dynamically depending on the past history of shocks, current firm size and the agent’s continuation value. When the ratio of continuation value to firm size is large, investment projects are chosen more efficiently, and project choice will depend more on the NPV and less on the signal to noise ratio. I show that the optimal contract can be implemented with an equity stake, bonus payments, as well as a personal account. Interestingly, when the contract features equity only, the project selection rule resembles a hurdle rate criterion. |
| JEL: | D86 G11 G31 G32 M12 M52 |
| Date: | 2011–04–25 |
| URL: | http://d.repec.org/n?u=RePEc:nwu:cmsems:1525&r=cta |
| By: | Shachat, Jason; Srivinasan, Anand |
| Abstract: | We report on experimental markets for a contingent claim asset that eight subjects traded for nine periods before the state was revealed. There is an informative binary signal that arrives after each of the first eight trading rounds. In our baseline treatment the realization of the signal is public information, and in another treatment, market participants are randomly sequenced and receive the signal as private information. In the latter case, we observe zero information aggregation and prices lock in on home grown norms, which we call informational price cascades. We test the fragility of the price cascades in two further treatments. First, we break the monopoly on each signal by revealing it to two subjects, and then we increase that number to four. It is only when we inform four participants, or one-half of the market, that cascades fail to form and information starts to aggregate in the market. |
| Keywords: | Information cascade; information aggregation; experiment; asset market |
| JEL: | G12 C92 D82 |
| Date: | 2011–04–14 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:30308&r=cta |
| By: | Kotowski , Maciej; Li, Fei |
| Abstract: | Consider an all-pay auction with interdependent, affiliated valuations and private budget constraints. We characterize a symmetric equilibrium for the case of two players. In contrast with the second-price auction, making budgets more severe can depress the bids of unconstrained bidders |
| Keywords: | All-Pay Auction; Budget Constraints; Lobbying; War of Attrition; Common Values; Private Values |
| JEL: | D44 |
| Date: | 2011–03–20 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:30468&r=cta |
| By: | Mougeot, Michel; Naegelen, Florence |
| Abstract: | Public service motivation is often considered as an argument for low- powered incentive schemes in the public sector. In this paper, we characterize the optimal contract between a public regulator and an altruistic agent according to the degree of public service motivation, when the type of the public service consumer is privately observed. We show that the requested effort is non decreasing with and can be higher than the first best level. Moreover we show that the agent is put on a high powered contract when some customers are served but that this contract is associated with different types of consumers according to : In contrast, the agent is never put on a cost-plus contract. Finally, we show that the first best allocation can be achieved under budget balance for a degree of altruism higher than a threshold that we characterize. |
| Keywords: | altruism; power of incentive schemes; regulation; countervailing incentives; public organization; |
| JEL: | D2 D8 L3 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:ner:dauphi:urn:hdl:123456789/5991&r=cta |
| By: | Jeanne Hagenbach (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, Université Panthéon Sorbonne - Paris 1 - Université Panthéon-Sorbonne - Paris I); Frédéric Koessler (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole des Ponts ParisTech - Ecole Normale Supérieure de Paris - ENS Paris, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris) |
| Abstract: | In this paper, we consider situations in which individuals want to choose an action close to others' actions as well as close to a payoff relevant state of nature with the ideal proximity to the common state varying across the agents. Before this coordination game with heterogeneous preferences is played, a cheap talk communication stage is offered to players who decide to whom they reveal the private information they hold about the state. The strategic information transmission taking place in the communication stage is characterized by a strategic communication network. We provide a direct link between players' preferences and the strategic communication network emerging at equilibrium, depending on the strength of the coordination motive and the prior information structure. Equilibrium strategic communication networks are characterized in a very tractable way and compared in term of efficiency. In general, a maximal strategic communication network may not exist and communication networks cannot be ordered in the sense of Pareto. However, expected social welfare always increases when the communication network expands. Strategic information transmission can be improved when group or public communication is allowed, and/or when information is certifiable. |
| Keywords: | cheap talk ; coordination ; partially verifiable types ; public and private communication |
| Date: | 2011–04–18 |
| URL: | http://d.repec.org/n?u=RePEc:hal:psewpa:halshs-00586847&r=cta |
| By: | Cigno, Alessandro (University of Florence) |
| Abstract: | As credit and insurance markets are imperfect, and given that intra-family transfers, and the way a child uses her time outside school hours, are private information, the second-best policy makes school enrollment compulsory, forces overt child labour below its efficient level (if positive), and uses a combination of need and merit based grants, financed by earmarked taxes, to relax credit constraints, redistribute and insure. Existing conditional cash transfer schemes can be made to approximate the second-best policy by incorporating these principles in some measure. |
| Keywords: | child labour, education, uncertainty, moral hazard, optimal taxation |
| JEL: | D82 H21 H31 I28 J24 |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp5663&r=cta |
| By: | Liran Einav; Amy Finkelstein; Stephen P. Ryan; Paul Schrimpf; Mark R. Cullen |
| Abstract: | In this paper we explore the possibility that individuals may select insurance coverage in part based on their anticipated behavioral response to the insurance contract. Such "selection on moral hazard" can have important implications for attempts to combat either selection or moral hazard. We explore these issues using individual-level panel data from a single firm, which contain information about health insurance options, choices, and subsequent claims. To identify the behavioral response to health insurance coverage and the heterogeneity in it, we take advantage of a change in the health insurance options offered to some, but not all of the firm's employees. We begin with descriptive evidence that is suggestive of both heterogeneous moral hazard as well as selection on it, with individuals who select more coverage also appearing to exhibit greater behavioral response to that coverage. To formalize this analysis and explore its implications, we develop and estimate a model of plan choice and medical utilization. The results from the modeling exercise echo the descriptive evidence, and allow for further explorations of the interaction between selection and moral hazard. For example, one implication of our estimates is that abstracting from selection on moral hazard could lead one to substantially over-estimate the spending reduction associated with introducing a high deductible health insurance option. |
| JEL: | D12 D82 G22 |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:16969&r=cta |
| By: | Michele Berardi |
| Abstract: | In a model of incomplete, heterogeneous information, with externalities and strategic interactions, we analyse the possibility of adaptive learning to act as coordination device. We build on the framework introduced by Angeletos and Pavan (2007) and extend it to a setting where agents need to learn to coordinate. We analyse conditions under which learning obtains, and show that adaptive learning can solve the problem of socially ine¢ cient coordination. |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:man:cgbcrp:157&r=cta |
| By: | Fiorella De Fiore; Harald Uhlig |
| Abstract: | We present a dynamic general equilibrium model with agency costs where: i) firms are heterogeneous in the risk of default; ii) they can choose to raise finance through bank loans or corporate bonds; and iii) banks are more efficient than the market in resolving informational problems. The model is used to analyze some major long-run differences in corporate finance between the US and the euro area. We suggest an explanation of those differences based on information availability. Our model replicates the data when the euro area is characterized by limited availability of public information about corporate credit risk relative to the US, and when european firms value more than US firms the flexibility and information acquisition role provided by banks. |
| JEL: | C68 E20 E44 |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:16979&r=cta |
| By: | Lionel de Boisdeffre (Centre d'Economie de la Sorbonne) |
| Abstract: | We consider a pure exchange economy, with incomplete financial markets, where agents face an "exogenous uncertainty", on the future state of nature and an "endogenous uncertainty", on the future price in each random state. Namely, every agents forms price anticipations on each spot market, distributed along an idiosyncratic probability law. At a sequential equilibrium, all agents expect the "true" price as a possible outcome and elect optimal strategies at the first period, which clear on all markets at every time period. We show that, provided the endogenous uncertainty is large enough, a sequential equilibrium exists under standard conditions, for all types of financial structures (i.e., with real, nominal and mixed assets). This result suggests that standard existence problems of sequential equilibrium models, following Hart (1975), stem form the single price expectation assumption. |
| Keywords: | Sequential equilibrium, temporary equilibrium, perfect foresight, expectations, incomplete markets, asymmetric information, arbitrage, existence proof. |
| JEL: | D52 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:11016&r=cta |
| By: | Artur Grigoryan |
| Abstract: | The paper models the incentives of a politician to delegate the decision making power in a sovereign wealth fund to an independent external manager. It formalizes the learning-effects as well as the increase of transparency of the SWF and the rise of investment possibilities associated with higher transparency. It also focuses on the role of elections as a basic mechanism to control and discipline politicians. I show that the politician has incentives for strategic behaviour if voters have incomplete information about his competence. The paper also studies when the delegation of decision making power is socially optimal and under which circumstances it takes place. |
| Keywords: | Sovereign Wealth Fund (SWF), transparency, policy delegation, external management |
| JEL: | D7 E6 F3 G2 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:sie:siegen:146-11&r=cta |