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on Contract Theory and Applications |
| By: | Berliant, Marcus; Yu, Chi-Ming |
| Abstract: | Canonical analysis of the classical general equilibrium model demonstrates the existence of an open and dense subset of standard economies that possess fully-revealing rational expectations equilibria. This paper shows that the analogous result is not true in urban economies under appropriate modifications for this field. An open subset of economies where none of the modified rational expectations equilibria fully reveals private information is found. There are two important pieces. First, there can be information about a location known by a consumer who does not live in that location in equilibrium, and thus the equilibrium rent does not reflect this information. Second, if a consumer's utility depends only on information about their (endogenous) location of residence, perturbations of utility naturally do not incorporate information about other locations conditional on the consumer's location of residence. Existence of equilibrium is proved. Space can prevent housing prices from transmitting information from informed to uninformed households, resulting in an inefficient outcome. |
| Keywords: | Urban Economics; General Equilibrium; Private Information; Rational Expectations |
| JEL: | R13 D82 D51 |
| Date: | 2012–09–15 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:41356&r=cta |
| By: | Dirk Bergemann; Ji Shen; Yun Xu; Edmund M. Yeh |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levarc:786969000000000559&r=cta |
| By: | Natalia Montinari (Max Planck Institute of Economics, Jena, Germany); Antonio Nicolò (University of Padua, Italy); Regine Oexl (University of Innsbruck, Austria) |
| Abstract: | We report evidence from an experiment where a principal chooses an agent out of two to perform a task for a fixed compensation. The principal's payoff depends on the agent's ex-ante ability and on a non-contractible effort that the agent has to exert once employed. We find that a significant share of principals select the mediocre agent (i.e. the one with the lower ex-ante ability). When the principal is allowed to send a message, mediocre agents exert more effort than agents with the higher ability, and principals who chooses mediocre agents on average have a larger payoff than principals who select agents with higher ability. This difference in effort overcompensates the difference in ability. Mediocre agents reciprocate more than agents who have ex-ante higher ability when the principals are able to make them feeling indebted. |
| Keywords: | reciprocity, communication, incentives, mediocrity |
| JEL: | C9 |
| Date: | 2012–09–12 |
| URL: | http://d.repec.org/n?u=RePEc:jrp:jrpwrp:2012-053&r=cta |
| By: | Qingmin Liu; George J. Mailath; Andrew Postlewaite; Larry Samuelson |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levarc:786969000000000551&r=cta |
| By: | Cao, Xiaoyong; Tian, Guoqiang |
| Abstract: | This paper studies equilibria of second price auctions in independent private value envi- ronments with different participation costs. Two types of equilibria are identified: monotonic equilibria in which a bidder with a lower participation cost results in a lower cutoff for sub- mitting a bid, and non-monotonic equilibria in which a lower participation cost results in a higher cutoff. We show that there always exists a monotonic equilibrium, and further, that the monotonic equilibrium is unique for either concave distribution functions or strictly convex distribution functions with non-increasing reverse hazard rates. There exist non- monotonic equilibria when the distribution functions are strictly convex and the difference of the participation costs is sufficiently small. We also provide comparative static analysis and study the limiting properties of equilibria when the difference in bidders’ participation costs approaches zero. |
| Keywords: | Private Values; Differentiated Participation Costs; Second Price Auctions; Non-monotonic Equilibrium; Existence and Uniqueness of Equilibrium |
| JEL: | D44 D61 D82 C72 C62 |
| Date: | 2012–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:41200&r=cta |
| By: | Kaminski, Bogumil; Latek, Maciej |
| Abstract: | We examine a market in which consumers are forced to rely on noisy price signals to select between homogeneous products. The noise originates either from firms' price obfuscation or consumers' bounded information processing capabilities. Standard models and empirical experiments of markets with noise or price obfuscation show that it leads to higher prices detrimental to consumers' welfare. This paper identifies conditions under which an opposite result can be expected. In particular, it shows that a moderate level of noise is beneficial to consumers in a market with a cost leader. |
| Keywords: | noisy pricing; bounded rationality; Bertrand oligopoly; game theory |
| JEL: | L13 C02 D43 C72 |
| Date: | 2012–09–14 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:41333&r=cta |
| By: | Miriam Schütte; Philipp C. Wichardt |
| Abstract: | This paper considers the e effcts of a two-period interaction on the decision of a principal to delegate authority to a potentially biased but better informed agent. Compared to the (repeated) one-period case, the agent's first period actions may also signal his type which in turn impacts wages in Period 2. As a result, biased agents have an incentive not to follow their own preferences in Period 1, thereby inducing the principal to delegate more often. Moreover, we find that, depending on the players' relative utilities and the wage schedule, long term relationships will increase aggregate welfare. Finally, to empirically support our findings, we analyse data from the German Socio-Economic Panel (SOEP) which show that temporary workers indeed experience less autonomy in their decisions. |
| Keywords: | delegation, signalling, reputation |
| JEL: | C72 C73 D82 D86 L22 M54 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwsop:diw_sp480&r=cta |
| By: | Paolo Crosetto (Max Planck Institute of Economics, Jena); Alexia Gaudeul (Max Planck Institute of Economics, Jena); Gerhard Riener (Düsseldorf Institute for Competition Economics (DICE), Heinrich Heine University, Düsseldorf) |
| Abstract: | We study theoretically and experimentally a two-person partnership game whereby agents only see the uncertain outcome of their joint effort but not how much the other agent contributed to it. The model combines problems of free-riding present in public good production and in teams with imperfect monitoring. We analyse effort and exit behaviour conditional on subjects' beliefs over the action taken by their partners and consider the effect of the availability and profitability of outside options. Our subjects do not adapt effort as a response to changes in their beliefs about the effort of their partner. Subjects display aversion for team work by exiting the partnership even when they believe their partner exerts sufficient effort to sustain it. Higher outside options do not either motivate or discourage effort in joint work but rather result in not only inefficient but also irrational breakdown in partnerships. Overall, social welfare decreases as the incentive to exit increases. |
| Keywords: | Imperfect monitoring, outside options, partnerships, public good production, repeated games, teams |
| JEL: | D82 H41 |
| Date: | 2012–09–11 |
| URL: | http://d.repec.org/n?u=RePEc:jrp:jrpwrp:2012-052&r=cta |
| By: | Farhi, Emmanuel; Tirole, Jean |
| Abstract: | The paper revisits and qualifies existing insights on security design. A rich literature argues that tranching creates debt-like instruments that are robust to adverse selection or discourage wasteful information acquisition. Yet, for a given information structure, while tranching confines and liquefies the safe part of a cash flow (the insulation effect), bundling makes the risky part more liquid (the trading adjuvant effect). Moreover, tranching always has adverse welfare effects on information acquisition: It encourages (discourages) information acquisition when it should be deterred (encouraged). The paper provides conditions under which tranching reduces welfare even when the insulation effect dominates the trading adjuvant effect. The paper’s second contribution is to analyze the velocity of assets that are repeatedly traded. The dynamic model can be nested into the static one and insights are shown to be closely related to those on tranching. The central insight is that liquidity is self-fulfilling: A perception of future illiquidity creates current illiquidity. |
| Keywords: | Liquidity, velocity, security design, tranching, information acquisition. |
| JEL: | D82 E51 G12 G14 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:26065&r=cta |
| By: | Farhi, Emmanuel; Tirole, Jean |
| Abstract: | The paper revisits and qualifies existing insights on security design. A rich literature argues that tranching creates debt-like instruments that are robust to adverse selection or discourage wasteful information acquisition. Yet, for a given information structure, while tranching confines and liquefies the safe part of a cash flow (the insulation effect), bundling makes the risky part more liquid (the trading adjuvant effect). Moreover, tranching always has adverse welfare effects on information acquisition: It encourages (discourages) information acquisition when it should be deterred (encouraged). The paper provides conditions under which tranching reduces welfare even when the insulation effect dominates the trading adjuvant effect. The paper’s second contribution is to analyze the velocity of assets that are repeatedly traded. The dynamic model can be nested into the static one and insights are shown to be closely related to those on tranching. The central insight is that liquidity is self-fulfilling: A perception of future illiquidity creates current illiquidity. |
| Keywords: | Liquidity, velocity, security design, tranching, information acquisition. |
| JEL: | D82 E51 G12 G14 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:ide:wpaper:26064&r=cta |
| By: | Ugur Akgun; Ioana Chioveanu |
| Abstract: | This paper considers the use of loyalty inducing discounts in vertical supply chains. An upstream manufacturer and a competitive fringe sell differentiated products to a retailer who has private information about the level of stochastic demand. We provide a comparison of market outcomes when the manufacturer uses two-part tariffs (2PT), all-unit quantity discounts (AU), and market share discounts (MS). We show that retailer ís risk attitude affects manufacturer's preferences over these three pricing schemes. When the retailer is risk-neutral, it bears all the risk and all three schemes lead to the same outcome. When the retailer is risk- averse, 2PT performs the worst from manufacturer's perspective but it leads to the highest total surplus. For a wide range of parameter values (but not for all) the manufacturer prefers MS to AU. By limiting the retailer's product substitution possibilities MS makes the demand for manufacturer's product more inelastic. This reduces the amount (share of total profits) the manufacturer needs to leave to the retailer for the latter to participate in the scheme. |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:edb:cedidp:12-07&r=cta |