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on Contract Theory and Applications |
| By: | Dirk Bergemann (Cowles Foundation, Yale University); Achim Wambach (Dept. of Economics, University of Cologne) |
| Abstract: | We consider the design of an optimal auction in which the seller can determine the allocation and the disclosure rule of the mechanism. Thus, in contrast to the standard analysis of a optimal auctions, the seller can explicitly design the disclosure of the information received by each bidder as his private information. We show that the optimal disclosure rule is a sequential disclosure rule, implemented in an ascending price auction. In the optimal disclosure mechanism, each losing bidder learns his true valuation, but the winning bidder only learns that his valuation is sufficiently high to win the auction. We show that in the optimal auction, the posterior incentive and participation constraints of all the bidders are satisfied. In the special case in which the bidders have no private information initially, the seller can extract the entire surplus. |
| Keywords: | Independent private value auction, Sequential disclosure, Ascending auctions, Information structure, Interim equilibrium, Posterior equilibrium |
| JEL: | C72 D44 D82 D83 |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:1900&r=cta |
| By: | Li X.; Peeters R.J.A.P. (GSBE) |
| Abstract: | We consider a cheap-talk setting that mimics the situation where an incumbent firm the sender is endowed with incentives to understate the true size of the market demand to two potential entrants the receivers. Although our experimental data reveals that senders messages convey truthful information and this is picked up by the receivers, this overcommunication relative to standard theoretical prediction does not enhance efficient entry levels and payoffs to beyond what can be achieved without any communication. The reason is that receivers fail to optimally translate the information received in their entry decision, possibly due to overcautiousness. |
| Keywords: | Noncooperative Games; Design of Experiments: Laboratory, Group Behavior; Asymmetric and Private Information; Mechanism Design; Search; Learning; Information and Knowledge; Communication; Belief; |
| JEL: | C72 C92 D82 D83 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:umagsb:2013035&r=cta |
| By: | Anton Kolotilin (School of Economics, the University of New South Wales) |
| Abstract: | A sender chooses ex ante how information will be disclosed ex post. A receiver obtains public information and information disclosed by the sender. Then he takes one of two actions. The sender wishes to maximize the probability that the receiver takes the desired action. I show that the sender optimally discloses only whether the receivers utility is above a cutoff. I derive necessary and sufficient conditions for the senders and receivers welfare to be monotonic in information. Most notably, the senders welfare increases with the precision of the senders potential information and decreases with the precision of public information. |
| Keywords: | information, disclosure, persuasion, stochastic orders |
| JEL: | C44 D81 D82 D83 |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:swe:wpaper:2013-17&r=cta |
| By: | Jullien, Bruno; Pouyet, Jérôme; Sand-Zantman, Wilfried |
| Abstract: | An economic agent may engage into an early negotiation with the sole pur- pose of gathering information to improve his bargaining position. We analyze this issue in the context of a buyer/seller relationship, where the seller has private information on the future gains from trade, and the buyer can bypass at some preliminary stage. While both players can wait until uncertainty is resolved and trade eciently ex-post, we show that the buyer may be better off by proposing an early contract. This early contract uses the sellers' pri- vate information to divide types in a way that makes costly bypass a credible threat. While some types of seller accept the contract because they gain more than in the status quo situation, other types only accept for fear that rejection would reveal too much information. We derive the whole set of equilibrium payoffs of this game, and study extensions to fit various economic situations. |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:ide:wpaper:27395&r=cta |
| By: | Lijian Wei (Finance Discipline Group, UTS Business School, University of Technology, Sydney); Wei Zhang (College of Management and Economics, Tianjin University); Xue-Zhong He (Finance Discipline Group, UTS Business School, University of Technology, Sydney); Yongjie Zhang (College of Management and Economics, Tianjin University) |
| Abstract: | What can traders learn and how does learning affect the market? When information is asymmetric, short-lived, and uninformed traders learn, we present an artificial limit order market model to examine the effect of learning, information value, and order aggressiveness on information dissemination efficiency, bid-ask spread, order submission, and order profit of traders. We find that learning helps the uninformed traders to acquire private information more effectively and hence improves market information dissemination. Also the informed traders in general consume liquidity while the uninformed traders mainly supply liquidity. More interestingly, due to the learning and short-lived information, the bid-ask spread and its volatility are positively related to the probability of informed trading. The results help us to understand the behavior of uninformed traders and provide substantial insight and intuition into the trading process. |
| Keywords: | Limit order book; continuous double auction; learning; information dissemination; order aggressiveness; bid-ask spread |
| JEL: | G14 C63 D82 |
| Date: | 2013–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:uts:rpaper:333&r=cta |
| By: | Chantal C. Cantarelli; Caspar G. Chorus; Scott W. Cunningham |
| Abstract: | Strategic behaviour is one of the main explanations for cost overruns. It can theoretically be supported by agency theory, in which strategic behaviour is the result of asymmetric information between the principal and agent. This paper gives a formal account of this relation by a signalling game. This is a game with incomplete information which considers the way in which parties anticipate upon other parties' behaviour in choosing a course of action. The game shows how cost overruns are the result of an inappropriate signal. This makes it impossible for the principal to distinguish between the types of agents, and hence, allows for strategic behaviour. It is illustrated how cost overruns can be avoided by means of two policy measures, e.g. an accountability structure and benchmarking. |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1307.2180&r=cta |
| By: | Dessi, Roberta (IDEI, Toulouse School of Economics); Miquel-Florensa, Pepita (Toulouse School of Economics) |
| Abstract: | We study the role of status in an experimental Principal-Agent game.Status is awarded to subjects based on either talent or luck. In each randomly matched principal-agent pair, the principal chooses the agent's status-contingent piece rate for a task in which talent matters for performance (an IQ test). We perform the experiment in Cambridge (UK) and in HCMV (Vietnam). We find that in Cambridge piece rate others are significantly higher for high-status agents (only) when status signals talent. However, these higher offers are not payoff-maximizing for the principals.In contrast, Vietnam piece rate offers are significantly higher for high-status agents (only) when status is determined by luck. We explore possible explanations, and the implications for status and incentives. |
| Keywords: | , , incentives, status, identity, piece rate, principal-agent, signaling, culture. |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:ide:wpaper:27274&r=cta |
| By: | Fulvio Fontini (Department of Economics and Management, University of Padua, Italy); Katrin Millock (Paris School of Economics, CNRS, Centre d’Economie de la Sorbonne); Michele Moretto (Department of Economics and Management, University of Padua, Italy) |
| Abstract: | In many cases consumers cannot observe firms’ investment in quality or safety, but have only beliefs on the average quality of the industry. In addition, the outcome of the collective investment game of the firms may be stochastic since firms cannot control perfectly the technology or external factors that may affect production. In such situations, when only consumers’ subjective perceptions of the industry level of quality matter, the regulator may make information available to firms or subsidize their information acquisition. Under what conditions is it desirable to make information available? We show how firms’ overall level of investment in quality depends upon the parameters of the quality accumulation process, the cost of investment and the number of firms in the industry. We also show the potentially negative effects on the total level of quality from providing information on consumers’ actual valuation. |
| Keywords: | Collective Reputation, Option Value, Quality |
| JEL: | C73 D92 L15 Q52 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:fem:femwpa:2013.53&r=cta |
| By: | George J. Mailath (Department of Economics, University of Pennsylvania); Larry Samuelson (Department of Economics, Yale University) |
| Abstract: | This paper, prepared for the Handbook of Game Theory, volume 4 (Peyton Young and Shmuel Zamir, editors, Elsevier Press), surveys work on reputations in repeated games of incomplete information. |
| Keywords: | commitment, incomplete information, reputation bound, reputation effects, long-run relationships, reputations |
| JEL: | C70 C73 |
| Date: | 2013–06–27 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:13-034&r=cta |
| By: | Giuseppe De Marco (Università di Napoli Parthenope and CSEF); Maria Romaniello (Seconda Università di Napoli) |
| Abstract: | In this paper we consider a model of games of incomplete information under ambiguity in which players are endowed with variational preferences. We provide an existence result for the corresponding mixed equilibrium notion. Then we study the limit behavior of equilibria under perturbations on the indices of ambiguity aversion. |
| Keywords: | Incomplete information games, multiple priors, variational preferences, equilibria |
| Date: | 2013–07–09 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:336&r=cta |
| By: | Andreea Cosnita-Langlais; Jean-Philippe Tropeano |
| Abstract: | We study the optimal timing of merger control by comparing the pre-and post closing enforcement. Mergers have both pro- and anticompetitive e¤ects, and the parties(the agency and the merging rms) veri able information on them is endogenous: it depends on the timing of the merger control, as well as on some investment in evidence production. The ex post enforcement turns out optimal whenever the costs of providing veri able information on both e¢ ciency gains and market power are su¢ ciently low, regardless of whether the rms know ex ante or not their true merger type. |
| Keywords: | merger control, competition policy, evidence production |
| JEL: | L41 K21 D82 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2013-22&r=cta |
| By: | Li X.; Peeters R.J.A.P. (GSBE) |
| Abstract: | In the recent past there have been numerous scandals around bad practices in the food industry. Although it can be easily rationalized why these bad practices have not been reported by the inflictors themselves, it is more difficult to understand why the non-inflicting competitors did not report their rivals conspicuous acts. In this paper we study these competitors incentives to acquire and to disclose information on the quality of their rivals products and how regulatory intervention may enhance information disclosure. Our model involves two firms that compete in prices within a differentiated product market, where the quality of one of the firms is publicly known while that of the other firm is unknown. Before the firms set their prices, the former firm has the possibility to acquire information on the quality of the latter firms product, and, if decided to do so, subsequently, the possibility to credibly reveal this information to the public. We find that low quality levels can be disclosed in a substitute market, but should not be expected to be disclosed in a complement market. Policies that mandate acquisition or disclosure may enhance disclosure of low quality levels, but fail to be welfare enhancing. |
| Keywords: | Market Structure and Pricing: Oligopoly and Other Forms of Market Imperfection; Information and Product Quality; Standardization and Compatibility; Enterprise Policy; |
| JEL: | L15 L53 D43 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:umagsb:2013032&r=cta |
| By: | Enchuan Shao |
| Abstract: | Recent studies in monetary theory show that if buyers can use lotteries to signal the quality of bank notes, counterfeiting does not occur in a pooling equilibrium. In this paper, I investigate the robustness of this non-existence result by considering an alternative trading mechanism. Specifically, a competitive search environment is employed in which sellers post offers and buyers direct their search based on those offers. In contrast to the previous studies, buyers’ ability to signal is fully eliminated in this environment. However, I find that counterfeiting does not exist if the equilibrium concept proposed by Guerrieri et al. (2010) is used. This is a refinement scheme in which sellers’ out-of-equilibrium beliefs about the likelihood of meeting with different types of buyers are restricted. Moreover, a threat of counterfeiting can result in the collapse of a monetary equilibrium. An extension of the model is provided which allows the threat of counterfeiting to materialize, in that some buyers cannot observe the offers, and therefore search randomly. Counterfeit notes are produced by those buyers who randomly search. |
| Keywords: | Bank notes |
| JEL: | D82 D83 E42 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:13-22&r=cta |
| By: | Kiridaran Kanagaretnam; Stuart Mestelman; S. M. Khalid Nainar; Mohamed Shehata |
| Abstract: | In a laboratory-controlled environment we provide experimental evidence on the effects of transparency (complete over incomplete information) and empowerment on trust (investment by a principal) and trustworthiness (reciprocal behavior of an agent). We implement a simple two-person investment game. We find that when principals are empowered by being able to punish agents who may not act in a way the principal believes is in the principal’s best interest, trust and investment increases over that which is realized in the absence of empowerment regardless of the degree of transparency. In transparent environments the effect of empowerment is about the same regardless of whether empowerment is introduced or removed. However, in opaque environments, the loss of empowerment has a substantially greater negative effect on trust than the positive effect associated with the introduction of empowerment. While this environment is substantially abstracted from the naturally occurring environment, these results suggest that practical public policies designed to increase transparency in financial transactions are likely to have positive effects on investment. Furthermore, public policies designed to empower principals, such as the Say-on-Pay practices, are likely to increase investment while the limitation of the empowerment of principals with respect to their agents (consistent with deregulation) will have a much more dramatic negative impact on trust (and ultimately, investment). |
| Keywords: | Investment, Empowerment, Disempowerment, Veto, Trust, Reciprocity, Say-on-Pay |
| JEL: | C7 C9 D3 D8 |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:mcm:deptwp:2013-09&r=cta |
| By: | Joshua Congdon-Hohman (Department of Economics, College of the Holy Cross); Jonathan A. Lanning (Department of Economics, Bryn Mawr) |
| Abstract: | This study examines ways in which workers respond to implicit incentives. Specifically, we examine the extent to which workers shift their effort to activities that are measured and which have been previously rewarded in the labor market. To examine this question, we examine the changes in the performance measures of professional baseball players in the season prior to the opportunity to freely negotiate their contract (free agency). We will examine different eras in baseball to examine if we can identify changes in behavior in this pivotal year based on changes to the current premium outputs for each time period. |
| Keywords: | Agency theory, strategic performance, opportunistic behavior, baseball |
| JEL: | J24 J31 L83 |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:hcx:wpaper:1304&r=cta |