|
on Contract Theory and Applications |
| By: | Mireille Chiroleu-Assouline (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); Jean-Christophe Poudou (LAMETA - Laboratoire Montpelliérain d'Economie Théorique et Appliquée - Université Montpellier I); Sébastien Roussel (LAMETA - Laboratoire Montpelliérain d'Economie Théorique et Appliquée - Université Montpellier I) |
| Abstract: | In this paper we aim at theoretically grounding the Reducing Emissions from Deforestation and Forest Degradation + (REDD+) scheme as a contractual relationship between countries in the light of the theory of incentives. Considering incomplete information about reference levels of deforestation as well as exogenous implementation and transaction costs, we compare two types of contracts : a deforestation performance-based contract and a conditional avoided deforestation-based contract. Because of the implementation and transaction costs, each kind of REDD+ contract implies a dramatically different information rent / efficiency trade-off. If the contract is performance-based (resp. conditionality-based), information rents are awarded to countries with the ex ante lowest (resp. highest) deforestation. In a simple quadratic setting, there is a reference level threshold in terms of efficiency towards less deforestation. In terms of expected welfare, conditional avoided deforestation-based schemes are preferred. |
| Keywords: | Conditionality; contract; deforestation; hidden information; incentives; performance; Reducing Emissions from Deforestation and Forest Degradation + (REDD+). |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00747405&r=cta |
| By: | Lionel De Boisdeffre (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon Sorbonne) |
| Abstract: | We consider a pure exchange financial economy, where agents, possibly asymetrically informed, face an "exogenous uncertainty", on the future state of nature, and an "endogenous uncertainty", on the future price in each random state. Namely, every agent forms private price anticipations on every prospective 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 and information signals across agents. This result suggests that standard existence problems of sequential equilibrium models, following Hart (1975), stem from the perfect foresight assumption. |
| Keywords: | Sequential equilibrium; temporary equilibrium; perfect foresight; existence; rational expectation; financial markets; asymmetric information; arbitrage. |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00746975&r=cta |
| By: | Sonja Brangewitz (University of Paderborn - Department of Business Administration and Economics); Gaël Giraud (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris) |
| Abstract: | We study the consequences of dropping the perfect competition assumption in a standard infinite horizon model with infinitely-lived traders and real collateralized assets, together with one additional ingredient : information among players is asymmetric and monitoring is incomplete. The key insight is that trading assets is not only a way to hedge oneself against uncertainty and to smooth consumption across time : it also enables learning information. Conversely, defaulting now becomes strategic : certain players may manipulate prices so as to provoke a default in order to prevent their opponents from learning. We focus on learning equilibria, at the end of which no player has incorrect beliefs -- not because those players with heterogeneous beliefs were eliminated from the market (although default is possible at equilibrium) but because they have taken time to update their prior belief. We prove a partial Folk theorem à la Wiseman (2011) of the following form : for any function that maps each state of the world to a sequence of feasible and strongly individually rational allocations, and for any degree of precision, there is a perfect Bayesian equilibrium in which patient players learn the realized state with this degree of precision and achieve a payoff close to the one specified for each state. |
| Keywords: | Strategic market games; infinite horizon; incomplete markets; collateral; incomplete information; learning; adverse selection. |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00747899&r=cta |
| By: | Simon Loertscher & Andras Niedermayer |
| Abstract: | Mechanisms according to which private intermediaries or governments charge transaction fees or indirect taxes are prevalent in practice. We consider a setup with multiple buyers and sellers and two-sided independent private information about valuations. We show that any weighted average of revenue and social welfare can be maximized through appropriately chosen transaction fees and that in increasingly thin markets such optimal fees converge to linear fees. Moreover, fees decrease with competition (or the weight on welfare) and the elasticity of supply but decrease with the elasticity of demand. Our theoretical predictions fit empirical observations in several industries with intermediaries. |
| Keywords: | brokers, applied mechanism design, linear commission fees, optimal indirect |
| JEL: | C72 C78 L13 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:mlb:wpaper:1162&r=cta |
| By: | Dhammika Dharmapala (University of Illinois); Thomas J. Miceli (University of Connecticut) |
| Abstract: | The Fourth Amendment prohibits unreasonable searches and seizures in criminal investigations. The Supreme Court has interpreted this to require that police obtain a warrant prior to search and that illegally seized evidence be excluded from trial. A consensus has developed in the law and economics literature that tort liability for police officers would be a superior means of deterring unreasonable searches. We argue that this conclusion depends on the assumption of truth-seeking police, and develop a game-theoretic model to compare the two remedies when some police officers (“bad” types) are willing to plant evidence in order to obtain convictions, while other police (“good” types) are not (where this type is private information). We characterize the perfect Bayesian equilibria of the asymmetric-information game between the police and a court that seeks to minimize error costs in deciding whether to convict or acquit suspects. In this framework, we show that the exclusionary rule with a warrant requirement leads to superior outcomes (relative to tort liability) in terms of the truth-finding function of courts, because the warrant requirement can reduce the scope for “bad” types of police to plant evidence. JEL Classification: K14, K42 Key words: Exclusionary rule, Fourth Amendment, search and seizure |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:uct:uconnp:2012-37&r=cta |
| By: | Gary D. Hansen; Minchung Hsu; Junsang Lee |
| Abstract: | The steady state general equilibrium and welfare consequences of health insurance reform are evaluated in a calibrated life-cycle economy with incomplete markets and endogenous labor supply. Individuals face uncertainty each period about their future health status, medical expenditures, labor productivity, access to employer provided group health insurance, and the length of their life. In this environment, incomplete markets and adverse selection, which restricts the type of insurance contracts available in equilibrium, creates a potential role for health insurance reform. In particular, we consider a policy reform that would allow older workers (aged 55-64) to purchase insurance similar to Medicare coverage. We find that adverse selection eliminates any market for a Medicare buy-in if it is offered as an unsubsidized option to individual private health insurance. Hence, we compare the equilibrium properties of the current insurance system with those that obtain with an optional buy-in subsidized by the government, as well as with several types of health insurance mandates. |
| JEL: | E6 H51 |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18529&r=cta |
| By: | Mahmoud Elamin |
| Abstract: | This paper identifies rating verifiability as a key difference that explains why credit rating agencies (CRAs) failed to mitigate information asymmetries in the structured finance market but succeeded in the bond market. Two infinitely repeated models are analyzed. In the first, the rating is unverifiable, and there is no equilibrium where the CRA reveals its information. In the second, the rating is verified with some probability, and full information revelation is guaranteed for any verification probability, when the CRA is patient enough. The interaction between verification probability and CRA patience is also analyzed. |
| Keywords: | Financial institutions ; Uncertainty |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:12-22&r=cta |
| By: | Rubén Hernández-Murillo |
| Abstract: | In this paper we study competition among non-benevolent local governments for mobile firms and evaluate the consequences of imposing alternative regimes of competition. In our model politicians act as regulators that offer incentives in the form of recommended output levels and socially-costly transfers to induce firms, which have private information on their costs, to operate in their community. Politicians fail to estimate correctly the social costs of public funds and competition drives firms' information rents to higher levels than under a cooperative regime. Therefore, from the perspective of a benevolent federation, aggregate welfare is reduced and constitutional constraints on the competition process may be desirable. Imposing a system of coarser policy instruments improves welfare, even when politicians are benevolent, because it reduces the costly rents that are granted to firms in equilibrium –at the cost of distorting output choices. We find that gains from resorting to constitutional constraints are maximal when communities are identical, but if the extent of asymmetry between locations increases, the advantages of the constrained regime decrease and can be overturned, because it prevents the more productive locations from attracting the more efficient firms. |
| Keywords: | Fiscal policy ; Public goods |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2012-052&r=cta |
| By: | Armstrong, Christopher S. (University of PA); Larcker, David F. (Stanford University); Ormazabal, Gaizka (University of Navarra); Taylor, Daniel J. (University of PA) |
| Abstract: | Prior research argues that a manager whose wealth is more sensitive to changes in the firm's stock price has a greater incentive to misreport. However, if the manager is risk-averse and misreporting increases both equity values and equity risk, the sensitivity of the manager's wealth to changes in stock price (portfolio delta) will have two countervailing incentive effects: a positive "reward effect" and a negative "risk effect." In contrast, the sensitivity of the manager's wealth to changes in risk (portfolio vega) will have an unambiguously positive incentive effect. We show that jointly considering the incentive effects of both portfolio delta and portfolio vega substantially alters inferences reported in prior literature. Using both regression and matching designs, and measuring misreporting using discretionary accruals, restatements, and SEC Accounting and Auditing Enforcement Releases, we find strong evidence of a positive relation between vega and misreporting and that the incentives provided by vega subsume those of delta. Collectively, our results suggest that equity portfolios provide managers with incentives to misreport when they make managers less averse to equity risk. |
| JEL: | G34 J33 M41 M52 |
| Date: | 2012–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:stabus:2120&r=cta |
| By: | Ahlberg , Joakim (VTI) |
| Abstract: | This study addresses a discrete common value environment with independent (one-dimensional) private signals, where the seller offers two identical units and the buyers have (flat) demand for both. Each session is conducted with 2, 3 or 4 buyers. Three auction formats are used: the discriminatory, uniform and Vickrey auctions which are all subjected to a variation in the number of bidders and to repeating bid rounds on each subject. The main findings are that there are no significant differences between the uniform and the discriminatory auction in collecting revenue, while the Vickrey auction comes out as inferior. More bidders in the auction result in a greater revenue and level out the performance across the mechanisms. Demand reduction is visible in the experiment, but it is not as prominent as anticipated. Moreover, subjects come closer to equilibrium play over time. Finally, the winner's curse is less severe than what is reported for inexperienced bidders in other studies. |
| Keywords: | Laboratory experiment; Multi-unit auction; Common value auction |
| JEL: | C72 C91 D44 |
| Date: | 2012–11–05 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:ctswps:2012_023&r=cta |
| By: | Berno Buechel (University of Hamburg); Tim Hellmann (Institute of Mathematical Economics); Stefan Kloessner (Saarland University) |
| Abstract: | We present a model of opinion formation where individuals repeatedly engage in discussion and update their opinion in a social network similarly to the DeGroot model. Abstracting from the standard assumption that individuals always report their opinion truthfully, agents in our model interact strategically in the discussion such that their stated opinion can dier from their true opinion. The incentive to do so is induced by agents' preferences for conformity. Highly conforming agents will state an opinion which is close to their neighbors' while agents with low level of conformity may be honest or even overstate their opinion. We model opinion formation as a dynamic process and identify conditions for convergence to consensus. Studying the consensus in detail, we show that an agent's social in uence on the consensus opinion is increasing in network centrality and decreasing in the level of conformity. Thus, lower conformity fosters opinion leadership. Moreover, assuming that the initial opinion is a noisy signal about some true state of the world, we consider the mean squared error of the consensus as an estimator for the true state of the world. We show that a society is \wise", i.e. the mean squared error is smaller, if players who are well informed are less conform, while uninformed players conform more with their neighbors. |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:bie:wpaper:469&r=cta |