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on Contract Theory and Applications |
| By: | Ralph Boleslavsky (Department of Economics, University of Miami); Maher Said (Olin Business School, Washington University in St. Louis) |
| Abstract: | We examine a model of long-term contracting in which the buyer is privately informed about the stochastic process by which her value for a good evolves. In addition, her realized values are also her private information. We characterize the profit-maximizing long-term contract offered by a monopolist in this setting. This optimal contract consists of a menu of deterministic sequences of static contracts. Within each sequence, higher real- ized values lead to greater quantity provision; however, an increasing proportion of buyer types are excluded over time (eventually leading to inefficient early termination of the re- lationship). Moreover, the menu choices differ by future generosity, with more costly (up- front) plans guaranteeing greater quantity provision in the future. Thus, the seller screens buyers in the initial period, and then progressively screens additional buyers so as to re- duce the information rents paid in future periods. |
| Keywords: | Asymmetric information, Dynamic mechanism design, Long-term contracts, Term life insurance, Sequential screening. |
| JEL: | C73 D82 D86 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:mia:wpaper:2011-5&r=cta |
| By: | Rodet, Cortney S. |
| Abstract: | This paper addresses the interaction of voter information and seniority on electoral accountability. We test whether information leads voters to be less tolerant of moral hazard in a legislative system favoring seniority. A simple game theoretic model is used to predict outcomes in a pork-barrel experiment where subjects act as legislators and voters. Senior legislators have an advantage in providing transfers which presents the opportunity to shirk where legislators can enrich themselves at the expense of voters. Voter information about incumbent behavior is varied across experimental treatments. We find that accountability increases when voters can compare their own legislator’s behavior to the behavior of others. Despite the fact that voters succumb to the incentives of seniority, information is effective in deterring legislator shirking. |
| Keywords: | voting; experiments; information; principal-agent problem |
| JEL: | C92 D89 D72 C91 P16 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:33193&r=cta |
| By: | Stahl, Konrad; Strausz, Roland |
| Abstract: | Who does, and who should initiate costly certification by a third party under asymmetric quality information, the buyer or the seller? Our answer - the seller - follows from a nontrivial analysis revealing a clear intuition. Buyer-induced certification acts as an inspection device, seller-induced certification as a signalling device. Seller-induced certification maximizes the certifier's profit and social welfare. This suggests the general principle that certification is, and should be induced by the better informed party. The results are reflected in a case study from the automotive industry, but apply also to other markets - in particular the financial market. -- |
| Keywords: | Asymmetric information,certification,information acquisition,inspection,lemons,middlemen,signaling |
| JEL: | D40 D82 L14 L15 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:zewdip:11054&r=cta |
| By: | Ronald M Harstad |
| Abstract: | Potential bidders respond to a sellerfs choice of auction mechanism for a common-value or affiliated-values asset by endogenous decisions whether to incur an information-acquisition cost (and observe a private estimate), or forgo competing. Privately informed participants decide whether to incur a bid-preparation cost and pay an entry fee, or cease competing. Auction rules and information flows are quite general; participation decisions may be simultaneous or sequential. The resulting revenue identity for any auction mechanism implies that optimal auctions are allocatively efficient; a nontrivial reserve price is revenue-inferior. Optimal auctions are otherwise contentless: any auction that sells without reserve becomes optimal by adjusting any one of the continuous, spanning parameters, e.g., the entry fee. Sellerfs surplus-extracting tools are now substitutes, not complements. Many econometric studies of auction markets are seen to be flawed in their identification of the number of bidders. |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:dpr:wpaper:0816&r=cta |
| By: | Fabrizi, Simona; Lippert, Steffen |
| Abstract: | The decision to cooperate within R&D joint ventures is often based on `expert advice.' Such advice typically originates in a due diligence process, which assesses the R&D joint venture's profitability, for example, by appraising the achievability of synergies. We show that if the experts who advise the owners considering forming an R&D joint venture are also responsible for R&D efforts, they can have incentives to withhold information about the extent of those synergies. Owners optimally react by reducing the incentives to innovate in low-value projects developed within R&D joint ventures and in high-value projects developed within competing research organizations. |
| Keywords: | Research and development; due diligence; experts' advice; joint venture; synergies; asymmetric information; moral hazard; information withholding (concealing) and revelation |
| JEL: | D86 L5 O38 O32 D82 L24 O31 |
| Date: | 2011–09–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:33207&r=cta |
| By: | Chris Edmond |
| Abstract: | This paper presents a model of information and political regime change. If enough citizens act against a regime, it is overthrown. Citizens are imperfectly informed about how hard this will be and the regime can, at a cost, engage in propaganda so that at face-value it seems hard. This coordination game with endogenous information manipulation has a unique equilibrium and the paper gives a complete analytic characterization of its comparative statics. If the quantity of information available to citizens is sufficiently high, then the regime has a better chance of surviving. However, an increase in the reliability of information can reduce the regime's chances. These two effects are always in tension: a regime benefits from an increase in information quantity if and only if an increase in information reliability reduces its chances. The model allows for two kinds of information revolutions. In the first, associated with radio and mass newspapers under the totalitarian regimes of the early twentieth century, an increase in information quantity coincides with a shift towards media institutions more accommodative of the regime and, in this sense, a decrease in information reliability. In this case, both effects help the regime. In the second kind, associated with diffuse technologies like modern social media, an increase in information quantity coincides with a shift towards sources of information less accommodative of the regime and an increase in information reliability. This makes the quantity and reliability effects work against each other. The model predicts that a given percentage increase in information reliability has exactly twice as large an effect on the regime's chances as the same percentage increase in information quantity, so, overall, an information revolution that leads to roughly equal-sized percentage increases in both these characteristics will reduce a regime's chances of surviving. |
| JEL: | C7 D7 D8 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17395&r=cta |
| By: | Kentaro Iwatsubo (Graduate School of Economics, Kobe University); Satoshi Kawanishi (Sophia University) |
| Abstract: | This paper studies the relationship between official announcements and the effectiveness of foreign exchange interventions in a noisy rational expectations equilibrium model. We show that when heterogeneously informed traders have inaccurate information, an exchange rate is likely to be misaligned from its fundamental value in the presence of noise trades. Then the central bank uses the disclosure of public information to improve the accuracy of private agentsf information and encourage risk-arbitrage thereby enhancing the informativeness of the exchange rate. This effect holds, even when the central bank does not possess superior information to traders, as long as public information is not perfectly correlated with the information of traders. We provide evidence that announced interventions are more effective in periods of high implied volatility, consistent with the theoretical prediction that the implied volatility of the exchange rate is positively correlated with the information inaccuracy of traders and the degree of an exchange rate misalignment. |
| Keywords: | Foreign exchange intervention, Announcements, Implied volatility |
| JEL: | F31 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:koe:wpaper:1116&r=cta |
| By: | Ralph Boleslavsky (Department of Economics, University of Miami); Tracy R. Lewis (Fuqua School of Business, Duke University) |
| Abstract: | An advocate for a special interest provides information to an uninformed planner for her to consider in making a sequence of important decisions. Although the advocate may have valuable information for the planner, it is is also known that the advocate is biased and will distort his advice if necessary to influence the planner's decision. Each time she repeats the problem, however, the planner learns about the accuracy of the advocate's recommendation, mitigating some of the advocate's incentive to act in a self-serving manner. We propose a theory of dynamic delegation to explain why planners do  sometimes rely on information provided by advocates in making decisions. The interaction takes place in two phases, a communication phase, followed by a sequence of decisions and learning by the planner. We ∑first establish that the capability to delegate dynamically is a necessary condition for influential communication in this setting, and characterize the optimal dynamic delegation policy. Next, we show that a planner may prefer to consult an an advocate rather than a neutral adviser. Finally, we demonstrate how an advocate gains influence with a decision maker by making his preferences for actions unpredictable. Our results have implications for a variety of real world interactions including regulation, organization, and whistleblowing. |
| Keywords: | Delegation, Advocates, Cheap Talk |
| JEL: | D82 D86 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:mia:wpaper:2011-7&r=cta |
| By: | Gerald D. Jaynes |
| Date: | 2011–09–03 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levarc:786969000000000243&r=cta |
| By: | Andrei Bremzeny (CEFIR and New Economic School); Elena Khokhlovaz (McKinsey&Company); Anton Suvorov (CEFIR and New Economic School); Jeroen van de Ven (University of Amsterdam) |
| Abstract: | Both psychologists and economists have argued that rewards often have hidden costs. One possible reason is that the principal may have incentives to offer higher rewards when she knows the task to be dificult. Our experiment tests if high rewards embody such bad news and if this is perceived by their recipients. Our design allows us to decompose the overall effect of rewards on effort into a direct incentive and an informational effect. The results show that most participants correctly interpret high rewards as bad news. In accordance with theory, the negative informational effect co-exists with the direct positive effect. |
| Keywords: | reward, bonus, informational content, motivation, crowdingout, laboratory experiment |
| JEL: | D82 D83 J33 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:cfr:cefirw:w0164&r=cta |
| By: | Andreas Blume (University of Pittsburgh); April M. Franco (Rotman School of Management, University of Toronto); Paul Heidhues (ESMT European School of Management and Technology) |
| Abstract: | We investigate dynamic coordination among members of a problem-solving team who receive private signals about which of their actions are required for a (static) coordinated solution and who have repeated opportunities to explore different action combinations. In this environment ordinal equilibria, in which agents condition only on how their signals rank their actions and not on signal strength, lead to simple patterns of behavior that have a natural interpretation as routines. These routines partially solve the team's coordination problem by synchronizing the team's search efforts and prove to be resilient to changes in the environment by being ex post equilibria, to agents having only a coarse understanding of other agents' strategies by being fully cursed, and to natural forms of agents' overconfidence. The price of this resilience is that optimal routines are frequently suboptimal equilibria. |
| Keywords: | coordination games, organizational routines, decentralized information, ex-post equilibria, cursed equilibria, multi-agent learning, rational learning |
| JEL: | C73 D23 |
| Date: | 2011–09–06 |
| URL: | http://d.repec.org/n?u=RePEc:esm:wpaper:esmt-11-10&r=cta |
| By: | Ralph Boleslavsky (Department of Economics, University of Miami); Christopher Cotton (Department of Economics, University of Miami) |
| Abstract: | A principal must decide whether to implement each of two independent proposals (e.g., earmark requests, policy reforms, grant funding) of unknown quality. Each proposal is represented by an agent who advocates by producing evidence about quality. Although the principal prefers the most-informative evidence, agents strategically choose less-informative evidence to maximize the probability the principal implements their proposals. In this setting, we show how limited capacity (i.e., the ability of the principal to implement at most one of the two proposals) can motivate agents to produce more-informative evidence in an effort to convince the principal that their proposal is better than the alternative. We derive reasonable conditions under which the principal prefers limited capacity to unlimited capacity. |
| Keywords: | Strategic search, Evidence production, Persuasion, Lobbying. |
| JEL: | D72 D78 D83 L15 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:mia:wpaper:2011-6&r=cta |
| By: | Françoise Forges (l'Université Paris-Dauphine); Roberto Serrano (Brown University and IMDEA Social Sciences Institute) |
| Abstract: | This is a brief survey describing some of the recent progress and open problems in the area of cooperative games with incomplete information. We discuss exchange economies, cooperative Bayesian games with orthogonal coalitions, and issues of cooperation in non-cooperative Bayesian games. |
| Keywords: | strategic externalities; informational externalities; exchange economies; cooperative games with orthogonal coalitions; non-cooperative bayesian games |
| JEL: | C71 C72 D51 D82 |
| Date: | 2011–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:imd:wpaper:wp2011-14&r=cta |
| By: | Liam Graham |
| Abstract: | Most DSGE models assume full information and model-consistent expectations. This paper relaxes both these assumptions in the context of the stochastic growth model with incomplete markets and heterogeneous agents. Households do not have direct knowledge of the structure of economy or the values of aggregate quanti?ties; instead they form expectations by learning from the prices in their market-consistent information sets. The economy converges quickly to an equilibrium which is similar to the equilibrium with model-consistent expectations and market-consistent information. Learning does not introduce strong dynamics at the aggre-gate level, though more interesting things happen at the household level. At least in the context of this model, assumptions about information seem important for aggregates; assumptions about the ability to form model-consistent expectations less so. |
| Keywords: | imperfect information; adaptive learning; dynamic general equilibrium; heterogeneity; expectations. |
| JEL: | D52 D84 E32 |
| Date: | 2011–08–20 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmawp:1113&r=cta |
| By: | Gökhan Cebiro˜glu; Ulrich Horst |
| Abstract: | We consider a large trader seeking to liquidate a portfolio using both a transparent trading venue and a dark pool. Our model captures the price impact of trading in transparent traditional venues as well as the execution uncertainty of trading in a dark pool. The unique optimal execution strategy uses both venues continuously. The order size in the dark pool can over- or underrepresent the portfolio size depending on adverse selection and the correlation structure of the assets in the portfolio. Introduction a dark pool results in delayed trading at the traditional venue. The appeal of the dark pool is increased by liquidity but reduced by adverse selection. By pushing up prices at the traditional venue and parallel selling in the dark pool, a trader might generate profits; we provide sufficient conditions to rule out such profitable price manipulation strategies. |
| Keywords: | Dark pools, Optimal liquidation, Adverse selection, Market microstructure, Illiquid markets |
| JEL: | C02 C61 G11 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2011-058&r=cta |
| By: | Gaurab Aryal; Isabelle Perrigne; Quang Vuong |
| Abstract: | In contrast to Aryal, Perrigne and Vuong (2009), this note shows that in an insurance model with multidimensional screening when only information on whether the insuree has been involved in some accident is available, the joint distribution of risk and risk aversion is not identified. |
| JEL: | C14 L62 D82 D86 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:acb:cbeeco:2011-552&r=cta |
| By: | Dimitra Petropoulou |
| Abstract: | This paper is motivated by the observation that intermediaries play an important role in international trade. The matching role of intermediaries is examined in a pairwise matching model with two-sided information asymmetry, where intermediaries develop contacts. Intermediation expands the set of matching technologies available to traders, while convexity in network-building costs with respect to network size gives rise to both direct and indirect trade in equilibrium. The trade pattern depends on the relative responsiveness of the direct and indirect matching technologies to information costs, which for some parameter values generates a non-monotonic relationship between information frictions and trade. |
| Keywords: | International trade ; Intermediation (Finance) ; Mathematical models |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:76&r=cta |
| By: | Dubois, Pierre; Ligon, Ethan A. |
| Abstract: | Using data on individual consumption expenditures from a sample of farm households in the Philippines, we construct a direct test of the risk-sharing implications of the collective household model. We are able to contrast the efficient outcomes predicted by the collective household model with the outcomes we might expect in environments in which food consumption delivers not only utils, but also nutrients which affect future productivity. Finally, we are able to contrast each of these two models with a third, involving a hidden action problem within the household; in this case, the efficient provision of incentives implies that the consumption of each household member depends on their (stochastic) productivity. The efficiency conditions which characterize the within-household allocation of food under the collective household model are violated, as consumption shares respond to earnings shocks. If future productivity depends on current nutrition, then this can explain some but not all of the response, as it appears that the quality of current consumption depends on past earnings. This suggests that some actions taken by household members are private, giving rise to a moral hazard problem within the household |
| Keywords: | Agricultural and Resource Economics |
| Date: | 2011–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:cdl:agrebk:2221195&r=cta |