|
on Contract Theory and Applications |
| By: | James Malcomson |
| Abstract: | This paper extends the relational contract model in Levin (2003) with shocks to theagent’s cost of effort (agent’s type) to shocks to the principal’s valuation of the agent’seffort (principal’s type). When optimal effort is fully pooled across agent types formultiple principal types, it is also pooled across those principal types. When optimaleffort separates some agent types for multiple principal types, it is not generally fullypooled across those principal types. But somewhat perversely, effort is then lower forsome principal type for which it is more valuable. Implications for employment andsupply relationships are discussed. |
| Keywords: | Relational incentive contracts, shocks, principal types, agent types |
| JEL: | C73 D82 D86 |
| Date: | 2012–12–05 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:634&r=cta |
| By: | James Malcomson |
| Abstract: | This paper investigates relational incentive contracts with a continuum of privatelyobservedagent types that are persistent over time. For a sufficiently productive relationship,a pooling contract exists in which all agent types continuing the relationshipchoose the same action. Necessary and sufficient conditions are given for some separationto be feasible; the parties can then do better than with full pooling. When futureactions are optimal, however, separation of all types is not possible; the finest separationachievable is into partitions each containing a non-degenerate interval of types.Separation always involves lower output initially than after separation has occurred. |
| Keywords: | Relational incentive contracts, private information, ratchet effect, dynamic enforcement |
| JEL: | C73 D82 D86 |
| Date: | 2012–12–04 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:633&r=cta |
| By: | Margaret Meyer; Florian Ederer; Richard Holden |
| Abstract: | It is often suggested that incentive schemes under moral hazard can be gamed by an agent with superior knowledge of the environment, and that deliberate lack of transparency about the incentive scheme can reduce gaming. We formally investigate these arguments. Ambiguous incentive schemes induce more balanced efforts from an agent who performs multiple tasks and is better informed about the environment, but also impose more risk on the agent. If tasks are sufficiently complementary for the principal, ambiguous schemes can dominate the best deterministic scheme and can completely eliminate the efficiency losses from the agent's better knowledge of the environment. |
| Keywords: | Contracts, incentives, gaming, strategic ambiguity, randomization |
| JEL: | L13 L22 |
| Date: | 2013–01–17 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:640&r=cta |
| By: | Chirantan Ganguly; Indrajit Ray |
| Abstract: | We consider a Battle of the Sexes game with incomplete information and allow cheap talk regarding players' private information before the game is played. We prove that the unique fully revealing symmetric cheap talk equilibrium has a desirable coordination property. Such coordination can also be obtained as a partially revealing cheap talk equilibrium. These outcomes can also be achieved using corresponding incentive compatible mechanisms, however, for different ranges of the prior probability. |
| Keywords: | Battle of the Sexes, Private Information, Cheap Talk, Coordination, Mechanism |
| JEL: | C72 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:bir:birmec:13-01&r=cta |
| By: | Nicolas Jacquemet (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, BETA - Bureau d'économie théorique et appliquée - CNRS : UMR7522 - Université de Strasbourg - Université Nancy II); Frédéric Koessler (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, 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 - Institut national de la recherche agronomique (INRA)) |
| Abstract: | This paper studies the value of private information in strictly competitive interactions in which there is a trade-off between (i) the short-run gain of using information, and (ii) the long-run gain of concealing it. We implement simple examples from the class of zero-sum repeated games with incomplete information. While the empirical value of information does not always coincide with the theoretical prediction, the qualitative properties of the value of information are satisfied in the laboratory: (i) it is never negative, (ii) it decreases with the number of repetitions, (iii) it is bounded below by the value of the infinitely repeated game, and (iv) it is bounded above by the value of the one-shot game. In line with the theory, the empirical use of private information is almost complete when it should be, and decreases in longer interactions. |
| Keywords: | Concealment of information; Laboratory experiments; Value of information; Zero-sum repeated games |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-00773412&r=cta |
| By: | Meißner, Fabian; Schneider, Georg; Sureth, Caren |
| Abstract: | In this paper we investigate the incentive effects of corporate taxes in an agency setting with a principal facing an investment opportunity including an abandonment option. We are particularly interested in the interplay of taxation and the real option on the principal's incentives to motivate the agent to work hard. First, we extend the well-known studies on tax effects on decision making under uncertainty to moral hazard settings. In a benchmark case we find that, as confirmed in current literature, the corporate income tax has no incentive effect. If the principal accounts for the real option we show that paradoxical tax effects may occur. Also, with respect to the effect of the real option on the incentive problem we show that the option makes it less attractive for the principal to induce the agent to exert a high effort. -- |
| Keywords: | Tax Effects,Real Options,Moral Hazard,Investment Decisions |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:arqudp:141&r=cta |
| By: | Chloe Qianzi Zeng |
| Abstract: | This paper studies a marriage market with two-sided information asymmetry in whichthe gains from marriage are stochastic. Contracts specify divisions of ex-post realizedmarital surplus. I first study a game in which one side of the matching market offerscontracts. I show that when expected marital surplus is strictly monotonic in agents’types, no separating equilibrium that achieves matching efficiency exists. I then studya social planner’s problem, finding necessary and sufficient conditions for a truthful directrevelation mechanism to achieve matching efficiency. These conditions become morestringent as the number of agents in the matching market increases. |
| Keywords: | Matching, two-sided information asymmetry, endogenous sharing rule, marriage market, stochastic marital surplus |
| JEL: | C78 D82 J12 D13 |
| Date: | 2012–11–26 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:630&r=cta |
| By: | Kahn, Lisa B. (Yale University) |
| Abstract: | Employer learning about workers' abilities plays a key role in determining how workers sort into jobs and are compensated. This study explores whether learning is symmetric or asymmetric, i.e., whether potential employers have the same information about worker ability as the incumbent firm. I develop a model of asymmetric learning that nests the symmetric learning case and allows the degree of asymmetry to vary, yielding testable implications for the prevalence of asymmetric learning. I then show how predictions in the model can be tested using compensation data. Using the NLSY, I test the model and find strong support for asymmetric information. I first exploit the fact that groups of workers differ in their variances in ability – based on economic conditions at time of entry into a firm – to show that incumbent wages track differences in ability distributions more closely than do outside firm wages. Second, I show that learning about ability is more symmetric for occupations that require more communication outside the firm. Finally, I show how to uncover the key parameter of interest in my model representing the degree to which information is asymmetric. My estimates imply that in one period, outside firms reduce the average expectation error over worker ability by roughly a third of the reduction made by incumbent firms. Thus outside firms retain sizeable expectation errors due to asymmetric information. |
| Keywords: | asymmetric information, personnel economics, employer learning |
| JEL: | D21 D83 J33 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp7147&r=cta |
| By: | Stefan Jönsson; Armin Schmutzler |
| Abstract: | This paper analyzes how all-pay auctions with endogenous prizes can be used to provide effort incentives. We show that wide classes of effort distributions can be implemented as equilibrium outcomes of such games. We also ask how all-pay auctions have to be structured so as to induce high expected highest efforts without generating excessive wasteful efforts of losers. All-pay auctions with endogenous prizes can do better than all-pay auctions with fixed prizes in this respect, in particular, when the prize function is approximately linear. We use the results to compare patents and prizes as innovation incentives, and to explore promotion incentives in organizations. |
| Keywords: | Contests, all-pay auctions, endogenous prizes, implementation |
| JEL: | D44 D43 D02 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:zur:econwp:108&r=cta |
| By: | Newton, Jonathan |
| Abstract: | This paper analyzes simple models of editorial control. Starting from the framework developed by Krishna and Morgan (2001a), we analyze 2-sender models of cheap talk where one or more of the senders has the power to veto messages before they reach the receiver. A characterization of the most informative equilibria of such models is given: it is shown that editorial control never aids communication and that for small biases in the senders' preferences relative to those of the receiver, necessary and sufficient conditions for information transmission to be adversely affected are that the senders have opposed preferences relative to the receiver and that they both have powers of editorial control. It is shown that the addition of further senders beyond two weakly decreases information transmission. |
| Keywords: | Wikipedia; editorial control; Cheap talk |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:syd:wpaper:2123/8896&r=cta |
| By: | Ferguson, Neil T. N. (DIW, Berlin) |
| Abstract: | This paper revisits the signalling literature of the interactions between terrorist organisations and governments. It argues that the theoretical literature to date, and particularly the signalling literature, builds models from the very singular backdrop of transnational terrorist spectaculars. Accordingly, policy recommendations cannot be extended to a broader realm of terrorist threats. By inverting the nature of the signalling, flipping it from a violent act to a peaceful one, this paper more accurately represents the continued interactions between terrorists and governments. A Revolutionary organisation exists and engages with the Incumbent government in order to affect material change to some aspect of the status quo. The Revolutionary believes that violence action and, in some cases, peacemaking, can achieve these goals. The Incumbent is suspicious of the Revolutionary and cannot observe if the Revolutionary is committed to violence or uses it, only, as a political tool. In the first period, the Revolutionary uses a costly peacemaking signal, selected from a continuous set, in an attempt to reveal its type and intentions to the Incumbent. In the second stage, both players engage simultaneously, choosing to devote resources to joint peaceful interaction or unilateral violence. This model sets out conditions that support pooling equilibria in which the signalling phase is ineffective and a separating equilibrium where the structure of the Incumbent’s beliefs leads to differences in the Revolutionary’s equilibrium behaviour. Accordingly, this model supports outcomes where Incumbent’s beliefs and incentives can deter a nominally peaceful terrorist organisation for ceasing violence, whilst also providing a rational as to why political resolutions are the most common means to end terrorist conflicts. |
| Keywords: | Terrorism; domestic conflict; game theory; signalling; Northern Ireland; South Africa; Spain; transnational terrorism; domestic terrorism |
| Date: | 2012–12–30 |
| URL: | http://d.repec.org/n?u=RePEc:ris:nepswp:2012_010&r=cta |
| By: | Qiu, Jianying; Weitzel, Utz |
| Abstract: | Abstract Popular models for decision making under ambiguity assume that people use not one but multiple priors. This paper is a first attempt to experimentally elicit multiple priors. In an ambiguous scenario with two underlying states we measure a subject’s single prior, her other potential priors (multiple priors), her confidence in these priors valuation of an ambiguous asset with the same underlying states. We also investigate subjects' updating of (multiple) priors after receiving signals about the true states. We find that single priors are best understood as a confidence-weighted average of multiple priors. Single priors also predict the valuation of ambiguous assets best, while both the minimum and maximum of subjects' multiple priors add explanatory power. This provides some but no exclusive support for the maxmin (Gilboa and Schmeidler, 1989) and the alpha maxmin model (Ghirardato et al., 2004). With regard to updating of priors, we do not observe strong deviations from Bayesian learning, although subjects overadjust/underadjust their priors and their confidence in multiple priors after a contradictory/confirming signal. Subjects also react to neutral information with more confidence in their priors. This holds under ambiguity, but not in a comparison treatment under risk. |
| Keywords: | ambiguity; uncertainty; risk; multiple priors; Bayesian updating; first-order beliefs; second-order beliefs |
| JEL: | D46 D83 C91 |
| Date: | 2013–01–24 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:43974&r=cta |
| By: | Christopher Cotton (Department of Economics, University of Miami); Arnaud Dellis (Department of Economics, Universite Laval and CIRPEE) |
| Abstract: | This paper challenges the prevailing view in the literature that informational lobbying is socially beneficial. Key to our analysis is the fact that policymakers are constrained on the number of issues they can address, which forces them to prioritize issues. Under reasonable conditions, interest groups advocating less-salient reforms produce information, inducing policymakers to prioritize those reforms instead of more-salient ones. Such distortion of the policy agenda reduces social welfare. Our story is consistent with empirical accounts of the lobbying process. |
| Keywords: | Informational lobbying, agenda setting, information collection, persuasion |
| JEL: | D72 D78 D83 |
| Date: | 2012–09–15 |
| URL: | http://d.repec.org/n?u=RePEc:mia:wpaper:2013-03&r=cta |
| By: | H Peyton Young; Thomas Noe |
| Abstract: | In recent years bonuses tied to performance have become commonplace in banks and other financial institutions; indeed they now constitute a major part of employee compensation. The practice was originally justified by academic work on principal-agent contracts, which argued that performance bonuses would better align the interests of managers and shareholders. In this article we argue that such schemes are not well-suited to aligning these interests in the financial sector. There are two reasons for this failure. First, new financial products make it easy to create the appearance of superior performance over long periods of time even though the outsize returns are merely being driven by hidden tail risk. We show that it is virtually impossible to create performance contracts that get around this problem. Second, the complexity of new products and the size of modern financial institutions make it extremely difficult (and costly) to monitor risky activities directly. As in the first case, compensation schemes, including deferred compensation, are inefficient substitutes because it is easy to escape detection for long periods of time. This opens the door for outright fraud. We argue that a greater emphasis on ethical values, e.g., a duty of care to customers and shareholders, is more likely to produce effective reforms. |
| Keywords: | Performance bonus, incentive contract, tail risk |
| JEL: | G20 G28 D86 |
| Date: | 2012–12–12 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:635&r=cta |