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on Contract Theory and Applications |
| By: | Joao Correia-da-Silva (CEF.UP and Universidade do Porto) |
| Abstract: | In a market with several independent cities, two firms with private information about their production costs decide whether to open a store in each city or restrict their activity to some cities. In cities where a single rm opens a store, this firm is a monopolist. In cities where both firms open stores, there is price competition with full revelation of private information. In equilibrium, both firms open stores in all the cities. Tacit collusion to divide the market is impeded because, by restraining from opening additional stores, a firm reveals its inefficiency, which triggers an attack from its rival. |
| Keywords: | Collusion, Market division, Two-sided private information, Adverse selection, Compromise game. |
| JEL: | C72 D82 L41 |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:por:fepwps:490&r=cta |
| By: | Baumann, Florian; Friehe, Tim |
| Abstract: | This paper analyzes private precautions against crime when the value of the property to be protected is private information. In a framework in which potential criminals can choose between different crime opportunities, we establish that decentralized decision-making by potential victims may lead to suboptimal levels of investment in private protection. This outcome is possible when observable precautions inform potential offenders about the value at risk even when the diversion effect due to private safety measures is taken into account. -- |
| Keywords: | crime,displacement,private protection,asymmetric information |
| JEL: | K42 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:dicedp:91&r=cta |
| By: | Bartosz Mackowiak (European Central Bank) |
| Abstract: | Decision-makers often face limited liability and thus know that their loss will be bounded. We study how limited liability affects the behavior of an agent who chooses how much information to acquire and process in order to take a good decision. We find that an agent facing limited liability processes less information than an agent with unlimited liability. The informational gap between the two agents is larger in bad times than in good times and when information is more costly to process. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:537&r=cta |
| By: | Nadia Loukil (Fiesta); Ouidad Yousfi (MRM) |
| Abstract: | This paper analyzes the relationship between public disclosure, private information and stock liquidity in Tunisian context using a sample of 41 listed firms in the Tunis Stock Exchange in 2007. First, we find no evidence that there is a relation between public and private information. Second, Tunisian investors do not trust the information disclosed in both annual reports and web sites, consequently it has no effects on stock liquidity, in contrast with private information. |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1304.4852&r=cta |
| By: | Hitoshi Matsushima (Faculty of Economics, University of Tokyo); Tomomi Tanaka (Economic Development & Global Education, LLC); Tomohisa Toyama (Faculty of Engineering, Kogakuin University) |
| Abstract: | We examine repeated prisoners' dilemma with imperfect private monitoring and random termination where the termination probability is low. We run laboratory experiments and show subjects retaliate more severely when monitoring is more accurate. This experimental result contradicts the prediction of standard game theory. Instead of assuming full rationality and pure self-interest, we introduce naiveté and social preferences, i.e., reciprocal concerns, and develop a model that is consistent with, and uniquely predicts, the observed behavior in the experiments. Our behavioral model suggests there is a trade-off between naiveté and reciprocity. When people are concerned about reciprocity, they tend to make fewer random choices. |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:tky:fseres:2013cf879&r=cta |
| By: | Marta Troya-Martinez |
| Abstract: | This paper uses a vertical relational contract between two firms to explore the implications of trade credit when the ability to repay is not observed by the supplier. Trade credit limits the supplier's possibilities to punish the cashless downstream firms and termination may be used in equilibrium. We find that the supplier always sells too little despite having enough instruments to fix the double marginalization problem. The downward distortion in the quantity results from the need to make the contract self-enforced and/or to tackle the asymmetric information problem. The distortion remains even as the firms become arbitrarily patient and a larger discount factor does not necessarily translate into a larger welfare. We show that the optimal contract resembles a simple debt contract: if the fixed repayment is met, the contract continues to the next period. Otherwise, the manufacturer asks for the highest possible repayment and terminates for a number of periods. The toughness of the termination policy decreases with the repayment. |
| Keywords: | Relational contracts, trade credit, imperfect monitoring |
| JEL: | C73 D82 L14 |
| Date: | 2013–03–18 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:648&r=cta |
| By: | Abdolkarim Sadrieh (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg); Guido Voigt (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg) |
| Abstract: | Supply chains facing asymmetric information can either operate in a cooperative mode with information and benefit sharing or can choose a non-cooperative form of interaction and align their incentives via screening contracts. In the cooperative mode, supply chain efficiency can be achieved, but high levels of trust and trustworthiness are required. In the non-cooperative mode, the contract mechanism guarantees a second best supply chain performance, but only if all parties choose their equilibrium strategies without trembles. Experimental evidence, however, shows that both operating modes often fail due to strategic risk. Cooperation is disrupted by deceptive signals and the lack of trust, whereas non-cooperative strategies suffer from persistent out-of-equilibrium behavior. We present an experiment on supply chain interaction with reduced strategic risk in both operating modes. We find that supply chain performance can reach a second-best level in either operating mode, if strategic risk is sufficiently reduced. We present two means to reduce strategic risk. First, a punishment mechanism leads to a better matching of trust and trustworthiness and supports the cooperative operating mode. Second, an enforcement of self-selection supports the non-cooperative equilibrium by increasing the attractiveness of screening contracts. We conclude that supply chain managers should seek to reduce the variability of the supply chain partners' behavior no matter what operating mode is considered. |
| Keywords: | Behavioral operations management, contracting, asymmetric information, punishment |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:mag:wpaper:130005&r=cta |
| By: | Che, XiaoGang; Lee, Peter; Yang, Yibai |
| Abstract: | This paper investigates the effect of resale allowance on entry strategies in a second price auction with two bidders whose entries are sequential and costly. We first characterize the perfect Bayesian equilibrium in cutoff strategies. We then show that there exists a unique threshold such that if the reseller's bargaining power is greater (less) than the threshold, resale allowance causes the leading bidder (the following bidder) to have a higher (lower) incentive on entry; i.e., the cutoff of entry becomes lower (higher). We also discuss asymmetric bidders and the original seller's expected revenue. |
| Keywords: | resale; sequential entry; costly participation; Second price auctions |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:syd:wpaper:2123/9029&r=cta |
| By: | Biais, Bruno; Foucault, Thierry; Moinas, Sophie |
| Abstract: | High-speed market connections and information processing improve financial institutions'ability to seize trading opportunities, which raises gains from trade. They also enable fast traders to process information before slow traders, which generates adverse selection. We first analyze trading equilibria for a given level of investment in fast-trading technology and then endogenize this level. Investments can be strategic substitutes or complements. In the latter case, investment waves can arise, where institutions invest in fast-trading technologies just to keep up with the others. When some traders become fast, it increases adverse selection costs for all, i.e., it generates negative externalities. Therefore equilibrium investment can exceed its welfare-maximizing counterpart |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:ide:wpaper:27008&r=cta |
| By: | Benabou, Roland (Princeton University); Tirole, Jean (IDEI) |
| Abstract: | This paper analyzes the impact of labor market competition and skill-biased technical change on the structure of compensation. The model combines multitasking and screening, embedded into a Hotelling-like framework. Competition for the most talented workers leads to an escalating reliance on performance pay and other high-powered incentives, thereby shifting effort away from less easily contractible tasks such as long-term investments, risk management and within-firm cooperation. Under perfect competition, the resulting efficiency loss can be much larger than that imposed by a single firm or principal, who distorts incentives downward in order to extract rents. More generally, as declining market frictions lead employers to compete more aggressively, the monopsonistic underincentivization of low-skill agents first decreases, then gives way to a growing overincentivization of high-skill ones. Aggregate welfare is thus hill-shaped with respect to the competitiveness of the labor market, while inequality tends to rise monotonically. Bonus caps and income taxes can help restore balance in agents' incentives and behavior, but may generate their own set of distortions. |
| Keywords: | incentives, performance pay, bonuses, executive compensation, inequality, multitask, contracts, screening, adverse selection, moral hazard, work ethic, Hotelling, competition |
| JEL: | D31 D82 D86 J31 J33 L13 M12 |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp7321&r=cta |
| By: | Baumann, Florian; Friehe, Tim |
| Abstract: | This paper analyzes whether the behavior of potential offenders can be guided by information on the actual detection probability transmitted by the policy maker. It is established that, when viewed as a cheap-talk game, the existence of equilibria with information transmission depends on the level of the sanction, the level of costs related to imposing the sanction, and the level of social harm resulting from the offense. In addition, we find that the policy maker (i.e., society as a whole) is not necessarily better off ex ante when more information is transmitted in equilibrium, but that potential offenders always are. -- |
| Keywords: | crime,cheap talk,law enforcement,imperfect information |
| JEL: | K42 H23 C72 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:dicedp:90&r=cta |
| By: | Alessandro Bonatti (MIT); Dirk Bergemann (Yale University) |
| Abstract: | We develop a model of data provision and data pricing in an environment with strategically interacting firms. The demand for data is generated by firms which seek to tailor their product positioning, or price, to either the individual or the aggregate demand. In turn, the data provider determines the amount of information released to the individual firms and the price to access it. We derive the optimal information and pricing policy of the data provider, under either individual or aggregate tailoring by the firms. We show that frequently the optimal information policy is to provide only partial and noisy information to the competing firms. In addition, the revenue of the data provider is commonly maximized by asymmetric or even exclusive information policies. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:538&r=cta |
| By: | Gerald Eisenkopf (Department of Economics, University of Konstanz, Germany); Sabrina Teyssier (INRA-ALISS, Ivery sur Seine, France) |
| Abstract: | Social preferences explain competitive behavior between agents and reciprocity towards a principal but there is no insight into the interaction of competition and reciprocity. We conducted a laboratory experiment with two treatments to address this issue. In a conventional tournament, an agent receives either the full prize or no prize at all. The other treatment provides the same incentives but the actual payment of an agent equals her expected payment. In both treatments the principal chooses between a low and a high guaranteed payment. Standard economic theory predicts the same effort provision in all situations. Our results show that inequity between agents’ payoffs and generosity of the principal determines the effectiveness of tournaments. Moreover, the data reveal that agents focus their preferences either on the principal or on the agent. |
| Keywords: | Tournament, Envy, Inequity, Agency problem |
| JEL: | M52 D03 C90 |
| Date: | 2013–04–11 |
| URL: | http://d.repec.org/n?u=RePEc:knz:dpteco:1307&r=cta |
| By: | Alex Gershkov; Benny Moldovanu; Xianwen Shi |
| Abstract: | We consider the standard mechanism design environment with linear utility but without monetary transfers. We first establish an equivalence between deterministic, dominant strategy incentive compatible mechanisms and generalized median voter schemes. We then use this equivalence to construct the constrained-efficient optimal mechanism for an utilitarian planner. |
| Keywords: | Mechanism Design, Dominant Strategy Implementation, Median Voter Schemes, Social Choice |
| JEL: | D82 D71 |
| Date: | 2013–04–10 |
| URL: | http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-481&r=cta |
| By: | Ozan Hatipoglu; Serhan Sadikoglu |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:bou:wpaper:2013/09&r=cta |
| By: | Gea M. Lee (School of Economics, Singapore Management University, 90 Stamford Road, Singapore 178903); Seung Han Yoo (Department of Economics, Korea University, Seoul, Republic of Korea 136-701) |
| Abstract: | This paper extends the signaling model by Spence (1973) to a dynamic frame-work in which human capital and signaling have a causal relationship: human capital investment is necessary to lower the marginal cost of signaling. We provide two main results on the characterization of equilibria. First, a pooling equilibrium can induce more worker types to make a human capital investment, and second, even with a pooling inducing fewer worker types to make the investment, the pooling?s social welfare can be greater. |
| Keywords: | Education, Human capital, Signaling |
| JEL: | D63 I21 J24 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:iek:wpaper:1301&r=cta |
| By: | Jovanovic, Dragan |
| Abstract: | We analyze the effects of synergies from horizontal mergers on managerial incentives. In contrast to synergies, efficiency gains resulting from managerial effort are not merger specific, i.e., they may be realized by all firms before and after a merger. We show that synergies suppress managerial incentives within the non-merging firms, whereas the effect on the merged firm critically depends on the number of agents employed by its principal. An important implication for merger policy is that consumer surplus may be monotonically decreasing in the synergy level, which opposes the use of an efficiency defense in merger control. -- |
| Keywords: | Managerial Incentives,Horizontal Mergers,Antitrust,Productive Efficiency Gains,Synergies,Moral Hazard,Efficiency Defense |
| JEL: | D21 D86 L22 L41 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:dicedp:88&r=cta |
| By: | Alexandre de Cornière; Romain De Nijs |
| Abstract: | An online platform makes a profit by auctioning an advertising slot that appears whenever a consumer visits its website. Several firms compete in the auction, and consumers differ in their preferences. Prior to the auction, the platform gathers data which is statistically correlated with consumers' tastes for products. We study the implications of the platform's decision to allow potential advertisers to access the data about consumers' characteristics before they bid. On top of the familiar trade-off between rent extraction and efficiency, we identify a new trade-off: the disclosure of information leads to a better matching between firms and consumers, but results in a higher equilibrum price on the product market. We find that the equilbrium price is an increasing function of the number of firms. As the number of firms becomes large, it is always profitable for the platform to disclose the information, but this need not be efficient, because of the distortion caused by the higher prices. When the quality of the match represents vertical shifts in the demand function, we provide conditions under which disclosure is optimal. |
| Keywords: | Online advertising, privacy, information disclosure, auctions |
| JEL: | D4 |
| Date: | 2013–03–22 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:650&r=cta |