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on Contract Theory and Applications |
| By: | Jeanne Hagenbach (Ecole Polytechnique - Ecole Polytechnique); 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 - INRA, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris) |
| Abstract: | We characterize sufficient conditions for full and decentralized disclosure of hard information in organizations with asymmetrically informed and self interested agents with quadratic loss functions. Incentive conflicts arise because agents have different (and possibly interdependent) ideal actions and different incentives to coordinate with each others. A fully revealing sequential equilibrium exists in the disclosure game if each player's ideal action is monotonic in types and types are independently distributed, but may fail to exist with non-monotonic ideal actions or correlated types. When biases between players' ideal actions are constant across states, complete information is the Pareto dominant information structure. In that case, there is a fully revealing sequential equilibrium in which informational incentive constraints are satisfied ex-post, so it exists for all possible prior beliefs, even when players' types are correlated. This existence result applies whether information disclosure is private or public, and is extended to partial certifiability of information. |
| Keywords: | Certifiable types ; Coordination ; Information disclosure ; Multi-divisional organizations |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00652279&r=cta |
| By: | Takasu, Yusuke |
| Keywords: | Income Smoothing, Cost of of Bank Loans, Information Asymmetry, Delegated Monitor, Private Information |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:hit:hjbswp:143&r=cta |
| By: | Hansen, Stephen; Motta, Massimo |
| Abstract: | In a vertical market in which downstream firms have private information about their productivity and compete for consumers, an upstream firm posts public bilateral contracts. When downstream firms are risk-neutral without wealth constraints, the upstream firm offers the input to all retailers. When they are sufficiently risk averse it sells to one, thereby eliminating externalities among downstream firms that necessitate the payment of risk premia. By similar reasoning exclusion is also optimal with downstream wealth constraints. Thus exclusion arises when contracts are fully observable and downstream firms are ex ante symmetric. The result is robust to a number of extensions. |
| Keywords: | Adverse selection; Exclusive contracts; Limited liability; Risk |
| JEL: | D82 L22 L42 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8982&r=cta |
| By: | Christoph March (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 - INRA, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Sebastian Krügel (Max Planck Institute of Economics - Max Planck Institute of Economics); Anthony Ziegelmeyer (Max Planck Institute of Economics - Max Planck Institute of Economics) |
| Abstract: | We investigate whether experimental participants follow their private information and contradict herds in situations where it is empirically optimal to do so. We consider two sequences of players, an observed and an unobserved sequence. Observed players sequentially predict which of two options has been randomly chosen with the help of a medium quality private signal. Unobserved players predict which of the two options has been randomly chosen knowing previous choices of observed and with the help of a low, medium or high quality signal. We use preprogrammed computers as observed players in half the experimental sessions. Our new evidence suggests that participants are prone to a 'social-confirmation' bias and it gives support to the argument that they naively believe that each observable choice reveals a substantial amount of that person's private information. Though both the 'overweighting-of-private-information' and the 'social-con firmation' bias coexist in our data, participants forgo much larger parts of earnings when herding naively than when relying too much on their private information. Unobserved participants make the empirically optimal choice in 77 and 84 percent of the cases in the human-human and computer-human treatment which suggests that social learning improves in the presence of lower behavioral uncertainty. |
| Keywords: | Information cascades ; Laboratory Experiments ; Naive herding |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00671378&r=cta |
| By: | Angelova, Vera; Attanasi, Giuseppe; Hiriart, Yolande |
| Abstract: | We compare the performance of liability rules for managing environmental disasters when third parties are harmed and cannot always be compensated. A firm can invest in safety to reduce the likelihood of accidents. The firm’s investment is unobservable to authorities. Externality and asymmetric information call for public intervention to define rules aimed at increasing prevention. We determine the investment in safety under No Liability, Strict Liability and Negligence, and compare it to the first best. Additionally, we investigate how the (dis)ability of the firm to fully cover potential damages affects the firm’s behavior. An experiment tests the theoretical predictions. In line with theory, Strict Liability and Negligence are equally effective; both perform better than No Liability; investment in safety is not sensitive to the ability of the firm to compensate potential victims. In contrast with theory, prevention rates absent liability are much higher and liability is much less effective than predicted. |
| Keywords: | Risk Regulation, Liability Rules, Incentives, Insolvency, Experiment. |
| JEL: | D82 K13 K32 Q58 |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:25820&r=cta |
| By: | Alain Delacroix; Shouyong Shi |
| Abstract: | We study a large market with directed search and signaling. Each seller chooses an investment that determines the quality of the good which is the seller's private information. A seller also chooses the price of the good and the number of selling sites. After observing sellers' choices of prices and sites, but not quality, buyers choose which price to search. The sites posting the same price and the buyers searching for that price match with each other randomly. In this environment, a seller's choices of prices and sites can direct buyers' search decisions and signal quality ex-ante. After matching, a buyer also receives an imperfectly informative signal about the quality of the good and decides whether to trade at the posted price. When the latter signal received is sufficiently accurate, we prove that there is a unique equilibrium. Moreover, when the quality differential is large, the equilibrium (under private information) implements the socially efficient allocation under public information. When the quality differential is small, the equilibrium is inefficient in the quality of goods produced or/and the number of sites created. This inefficiency is caused by a conflict between the search-directing role and the signaling role of a posted price. We also compare the price-posting equilibrium with the equilibrium under bargaining. The bargaining equilibrium features efficient quality, but inefficient entry. It is superior to the price-posting equilibrium when a seller's bargaining power is intermediate and the quality differential is small. |
| Keywords: | Directed search; Search, Signaling; Pricing; Efficiency |
| JEL: | D8 C78 E24 |
| Date: | 2012–05–18 |
| URL: | http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-455&r=cta |
| By: | Federico Weinschelbaum (Department of Economics, Universidad de San Andres & CONICET); Leandro Arozamena (Department of Economics, UTDT & CONICET); Nicolas Shunda (University of Redlands) |
| Abstract: | In many auction settings, there is favoritism: the seller's welfare depends positively on the utility of a subset of potential bidders. However, laws or regulations may not allow the seller to discriminate among bidders. We find the optimal nondiscriminatory auction in a private value, single-unit model under favoritism. At the optimal auction there is a reserve price, or an entry fee, which is decreasing in the proportion of preferred bidders and in the intensity of the preference. Otherwise, the highest-valuation bidder wins. We show that, at least under some conditions, imposing a no-discrimination constraint raises expected seller revenue. |
| Keywords: | auctions,favoritism,nondiscriminatorymechanisms |
| JEL: | C72 D44 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:sad:wpaper:110&r=cta |
| By: | Bardey, David; De Donder, Philippe |
| Abstract: | We develop a model where a genetic test reveals whether an individual has a low or high probability of developing a disease. A costly prevention effort allows high-risk agents to decrease this probability. Agents are not obliged to take the test, but must disclose its results to insurers, and taking the test is associated to a discrimination risk. We study the individual decisions to take the test and to undertake the prevention effort as a function of the effort cost and of its efficiency. If effort is observable by insurers, agents undertake the test only if the effort cost is neither too large nor too low. If the effort cost is not observable by insurers, moral hazard increases the value of the test if the effort cost is low. We offer several policy recommendations, from the optimal breadth of the tests to policies to do away with the discrimination risk. |
| Keywords: | discrimination risk; informational value of test; personalized medecine |
| JEL: | D82 I18 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8977&r=cta |
| By: | Peter O. Christensen (Aarhus University); Zhenjiang Qin (Aarhus University and CREATES) |
| Abstract: | In an incomplete market setting with heterogeneous prior beliefs, we show that public information can have a substantial impact on the ex ante cost of capital, trading volume, and investor welfare. In a model with exponential utility investors and an asset with a normally distributed dividend, the Pareto efficient public information system is the system which enjoys the maximum ex ante cost of capital, and the maximum expected abnormal trading volume. The public information system facilitates improved dynamic trading opportunities based on heterogeneously updated posterior beliefs in order to take advantage of the disagreements and the differences in con?dence among investors. This leads to a higher growth in the investors?certainty equivalents and, thus, a higher equilibrium interest rate, whereas the ex ante risk premium on the risky asset is unaffected by the informativeness of the public information system. In an effectively complete market setting, in which investors do not need to trade dynamically in order to take full advantage of their differences in beliefs, the ex ante cost of capital and the investor welfare are both higher than in the incomplete market setting, but they are independent of the informativeness of the public information system, and there is no information-contingent trade. |
| Keywords: | Heterogeneous Beliefs, Public Information Quality, Dynamic Trading, Cost of Capital, Investor Welfare |
| JEL: | G1 G11 G12 |
| Date: | 2012–04–15 |
| URL: | http://d.repec.org/n?u=RePEc:aah:create:2012-22&r=cta |
| By: | Dorsch, Michael; Dunz, Karl; Maarek, Paul |
| Abstract: | This paper considers the role of asymmetric information in a political agency theory of autocratic economic policy making. Within the context of a static game, we analyze the strategic interaction between an elite ruling class that sets policy and an imperfectly informed disenfranchised class, who may choose to revolt. We identify the Perfect Bayesian Equilibrium (PBE), which need not be pure strategies. We enrich the basic model in an extension that includes two-sided uncertainty and introduces an additional constraint on the elite's policy decision. The extended model features pure strategies in the PBE, which can include inefficient policy choices and revolution. We char- acterize the equilibrium strategies in terms of the economy's level of development. |
| Keywords: | Political transition; Revolution; Asymmetric information; Perfect Bayesian equilibrium |
| JEL: | D71 D74 P48 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:38879&r=cta |
| By: | Martin Brown (University of St. Gallen); Matthias Schaller (University of St. Gallen); Simone Westerfeld (University of Applied Sciences Northwestern Switzerland); Markus Heusler (Risk Solution Network AG) |
| Abstract: | We employ a unique dataset of 6,669 credit assessments for 3,542 small businesses by nine banks using an identical rating model over the period 2006-2011 to examine (i) to what extent loan officers use their discretion to smooth credit ratings of their clients, and (ii) to assess whether this use of discretion is driven by information about the creditworthiness of the borrower or by the insurance of clients against fluctuations in lending conditions. Our results show that loan officers make extensive use of their discretion to smooth clients' credit ratings: One in five rating shocks induced by changes in the quantitative assessment of a client is reversed by the loan officer. This smoothing of credit ratings is prevalent across all rating classes, is independent of whether the borrower experiences a positive or a negative rating shock, and is independent of whether the shock is firm-specific or market-related. We find that discretionary rating changes have limited power in predicting future loan performance, indicating that the smoothing of credit ratings is only partially driven by information about creditworthiness. Instead, in line with the implicit contract view of credit relationships loan officers are more likely to smooth ratings when rating shocks have stronger implications for interest rates. |
| Keywords: | Asymmetric information, Credit rating, Implicit contracts, Relationship banking |
| JEL: | D82 G21 L14 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:anc:wmofir:67&r=cta |
| By: | Zhenjiang Qin (Aarhus University and CREATES) |
| Abstract: | In an incomplete market setting with heterogeneous prior beliefs, I show that public information and strike price of option have substantial infl?uence on asset pricing in option markets, by investigating an absolute option pricing model with negative exponential utility investors and normally distributed dividend. I demonstrate that heterogeneous prior variances give rise to the economic value of option markets. In- vestors speculate in option market and public information improves allocational efficiency of markets only when there is heterogeneity in prior variance. Heterogeneity in mean is neither a necessary nor sufficient condition for generating speculations in op- tion markets. With heterogeneous beliefs, options are non-redundant assets which can facilitate side-betting and enable investors to take advantage of the disagreements and the differences in con?dence. This fact leads to a higher growth rate in the investors? certainty equivalents and, thus, a higher equilibrium interest rate. The public infor- mation system facilitates improved dynamic trading opportunities in option markets based on the heterogeneously updated posterior beliefs. With an intermediate signal precision and the option with intermediate strike price, the highest efficiency of side- betting is achieved, re?ected by a unique maximum point of the ex ante equilibrium interest rate. The public signal precision affects ex ante equilibrium risk premium only via its relationship with option. |
| Keywords: | Heterogeneous Beliefs, Public Information Quality, Option Market, Dynamic Trading, Bayesian Learning. |
| JEL: | G1 G11 G12 |
| Date: | 2012–04–15 |
| URL: | http://d.repec.org/n?u=RePEc:aah:create:2012-23&r=cta |
| By: | Jean-Olivier Hairault (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon Sorbonne, IZA - Institute for the Study of Labor); François Langot (IZA - Institute for the Study of Labor, GAINS-TEPP - Université du Mans, CEPREMAP - Centre pour la recherche économique et ses applications); Sébastien Ménard (GAINS - Université du Maine); Thepthida Sopraseuth (CEPREMAP - Centre pour la recherche économique et ses applications, GAINS-TEPP - Université du Maine) |
| Abstract: | This paper studies the optimal unemployment insurance for older workers in a repeated principal-agent model, where the search intensity of risk-averse workers (the agents) is not observed by the risk-neutral insurance agency (the principal). When unemployment benefits are the only available tool, the insurance agency is not able to induce older workers to search for a job. This is because of the short time-horizon of workers close to retirement. We propose to introduce a pension tax dependent on the length of the unemployment spell. We show that this device performs better than a wage tax after re-employment. First, it makes jobs more attractive, as they are free of tax. Second, because re-employment will be short-lived, a pension tax is a more powerful incentive than a wage tax, and provides more substantial fiscal gains to the agency. Finally, a pension tax allows those workers near retirement who still do not exercise job search to smooth their consumption during their unemployment spell, as if they could borrow against their future pension. |
| Date: | 2012–02–13 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00668989&r=cta |
| By: | Raphael Boleslavsky (Department of Economics, University of Miami); Christopher F. Parmeter (Department of Economics, University of Miami) |
| Abstract: | We consider a game in which schools compete to place graduates in two distinct ways: by investing in the quality of education, and by strategically designing grading policies. In equilib- rium, schools issue grades that do not perfectly reveal graduate abilities. This leads evaluators to have less-accurate information. However, compared to fully-revealing assessments, strategic grading motivates greater investment in educating students. Although strategic grading distorts placement decisions, it can also increase graduate ability. Allowing grade in ation and related grading strategies can increase the probability that the evaluator selects a high-ability graduate. |
| Keywords: | Grade Inflation; Effort, Education Investment |
| JEL: | D01 I2 |
| Date: | 2012–03–15 |
| URL: | http://d.repec.org/n?u=RePEc:mia:wpaper:2012-2&r=cta |
| By: | Shen, Chung-Hua (Department of Finance, National Taiwan University); Huang , Yu-Li (Department of Insurance and Financial Management, Takming University of Science and Technology); Hasan , Iftekhar (Fordham University & Bank of Finland) |
| Abstract: | This study proposes an information asymmetry hypothesis to examine why bank credit ratings vary among countries even when bank financial ratios remain constant. Countries are divided among those with low and high information asymmetry. The former include high-income countries, those in North America and West Europe regions, and those with strong institutional environment quality, whereas the latter group possess the opposite characteristics. This study hypothesizes that the influences of financial ratios on ratings are enhanced in low information asymmetry countries but reduced in countries with high information asymmetry. The sample includes the long-term credit ratings issued by Standard and Poor’s from 86 countries during 2002–2008. The estimated results show that the effects of financial ratios on ratings are significantly affected by information asymmetries. Countries wishing to improve the credit ratings of their banks thus should reduce information asymmetry. |
| Keywords: | bank rating; financial ratio; information asymmetry; institutional quality |
| JEL: | G21 G32 G38 |
| Date: | 2012–04–12 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2012_013&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 induce that person to exert little effort to increase his income. Such behavior generates a Good Samaritan Dilemma, in which welfare is lower than when no one is altruistic. Governmental transfers, which restrict reallocation from a person who saves much to one who saves little, reduce the effect, 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: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:irv:wpaper:111209&r=cta |
| By: | Antonio Cabrales (Departamento de Economía - Universidad Carlos III de Madrid); Olivier Gossner (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 - INRA, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, LSE - London School of Economics and Political Science - LSE); Roberto Serrano (Department of Economics - Brown University, IMDEA - Madrid Institute for Advanced Studies - Universidad Politécnica de Madrid) |
| Abstract: | Consider any investor who fears ruin when facing any set of investments that satisfy no-arbitrage. Before investing, he can purchase information about the state of nature in the form of an information structure. Given his prior, information structure $\alpha$ is more informative than information structure $\beta$ if, whenever he is willing to buy $\beta$ at some price, he is also willing to buy $\alpha$ at that price. We show that this informativeness ordering is complete and is represented by the decrease in entropy of his beliefs, regardless of his preferences, initial wealth, or investment problem. We also show that no prior-independent informativeness ordering based on similar premises exists. |
| Keywords: | Informativeness ; Information structures ; Entropy ; Decision under uncertainty ; Investment ; Blackwell ordering |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00648884&r=cta |
| By: | Francis, Bill (Rensselaer Polytechnic Institute); Hasan, Iftekhar (Fordham University and Bank of Finland); Koetter, Michael (University of Groningen); Wu, Qiang (Rensselaer Polytechnic Institute) |
| Abstract: | We investigate the role of corporate boards in bank loan contracting. We find that when corporate boards are more independent, both price and nonprice loan terms (e.g., interest rates, collateral, covenants, and performance-pricing provisions) are more favorable, and syndicated loans comprise more lenders. In addition, board size, audit committee structure, and other board characteristics influence bank loan prices. However, they do not consistently affect all nonprice loan terms except for audit committee independence. Our study provides strong evidence that banks tend to recognize the benefits of board monitoring in mitigating information risk ex ante and controlling agency risk ex post, and they reward higher quality boards with more favorable loan contract terms. |
| Keywords: | corporate governance; corporate boards; loan contract terms |
| JEL: | G21 G34 |
| Date: | 2012–04–12 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2012_014&r=cta |
| By: | Farhi, Emmanuel; Tirole, Jean |
| Abstract: | The paper shows that time-consistent, imperfectly targeted support to distressed institutions makes private leverage choices strategic complements. When everyone engages in maturity mismatch, authorities have little choice but intervening, creating both current and deferred (sowing the seeds of the next crisis) social costs. In turn, it is profitable to adopt a risky balance sheet. These insights have important consequences, from banks choosing to correlate their risk exposures to the need for macro-prudential supervision. |
| Keywords: | monetary policy, funding liquidity risk, strategic complementarities, macro-prudential supervision |
| JEL: | E44 E52 G28 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:ner:toulou:http://neeo.univ-tlse1.fr/3135/&r=cta |