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on Contract Theory and Applications |
| By: | Iossa, Elisabetta; Martimort, David |
| Abstract: | A risk averse agent gathers information on productivity shocks and produces accordingly on behalf of his principal. Information gathering is imperfect so that the agent has either complete or no knowledge at all of those shocks. The model allows for moral hazard in information gathering, private information on productivity shocks and moral hazard on operating effort. Two polar scenarios of the agency literature with either pure hidden action (the agent exerts operating effort not knowing yet the realization of the shock) or pure hidden information (the agent knows that shock when exerting operating effort) arise endogenously with positive probability. An optimal menu of linear contracts mixes high-powered, productivity-dependent screening options following “good news” with a fixed low-powered option that solves a pure moral hazard problem otherwise. |
| Keywords: | hidden action; hidden information; Incentive mechanisms; information gathering |
| JEL: | D82 H41 |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9552&r=cta |
| By: | Kohei Kawamura (University of Edinburgh) |
| Abstract: | This paper studies information transmission between an uninformed decision maker (receiver) and an informed player (sender) who have asymmetric beliefs ("con?fidence") on the sender?s ability ("competence") to observe the state of nature. We fi?nd that even when the material payoffs of are perfectly aligned, the sender?s over- and underconfi?dence on his information give rise to information loss in communication, although they do not by themselves completely eliminate information transmission in equilibrium. However, an underconfi?dent sender may prefer no communication to informative communication. We also show that when the sender is biased, overconfidence can lead to more information transmission and welfare improvement. |
| JEL: | D03 D83 |
| Date: | 2013–09–13 |
| URL: | http://d.repec.org/n?u=RePEc:edn:esedps:222&r=cta |
| By: | Axel Dreher; Kai Gehring; Christos Kotsogiannis; Silvia Marchesi |
| Abstract: | This paper explores the role of information transmission and misaligned interests across levels of government in explaining variation in the degree of decentralization across countries. Within a two-sided incomplete information principal-agent framework, it analyzes two alternative policy-decision schemes —‘decentralization’ and ‘centralization’— when ‘knowledge’ consists of unverifiable information and the quality of communication depends on the conflict of interests between the government levels. It is shown that, depending on which level of policy decision-making controls the degree of decentralization, the extent of misaligned interests and the relative importance of local and central government knowledge affects the optimal choice of policy-decision schemes. The empirical analysis shows that countries’ choices depend on the relative importance of their private information and the results differ significantly between unitary and federal countries. |
| Keywords: | delegation, centralization, communication, fiscal decentralization, state and local government |
| JEL: | H7 H77 D82 D83 C23 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:mib:wpaper:253&r=cta |
| By: | Estache, Antonio; Foucart, Renaud |
| Abstract: | We study a political system in which voters can optimally pick between political platforms, but cannot screen the quality of individual politicians associated with these platforms. A bad individual achievement can correspond to either incompetence (adverse selection) or corruption (moral hazard). Information could improve, if independent experts assess achievements as compared to commitments, allowing independent judges to investigate possible corruption. We find that while good experts are always beneficial as they increase transparency, the impact of the quality of judges is ambiguous. Above a threshold, with risk-averse social planners, good judges increase the incentive-compatible punishment of politicians, at the cost of possible judiciary mistakes. |
| JEL: | D7 D82 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9467&r=cta |
| By: | Iossa, Elisabetta; Rey, Patrick |
| Abstract: | We study how career concerns affect the dynamics of incentives in a multi-period contract, when the agent’s productivity is a stochastic function of his past productivity and investment. We show that incentives are stronger and performance is higher when the contract approaches its expiry date. Contrary to common wisdom, long-term contracts may strengthen reputational effects whereas short-term contracting may be optimal when investment has persistent, long-term effects. |
| Keywords: | career concerns; career duration; contract renewal; dynamic incentives; reputation |
| JEL: | D21 D23 D86 L24 L51 |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9571&r=cta |
| By: | Edmans, Alex; Goldstein, Itay; Zhu, John |
| Abstract: | This paper studies multi-agent optimal contracting with cost synergies. We model synergies as the extent to which effort by one agent reduces his colleague's marginal cost of effort. An agent's pay and effort depend on the synergies he exerts, the synergies his colleagues exert on him and, surprisingly, the synergies his colleagues exert on each other. It may be optimal to "over-work" and "over-incentivize" a synergistic agent, due to the spillover effect on his colleagues. This result can rationalize the high pay differential between CEOs and divisional managers. An increase in the synergy between two particular agents can lead to a third agent being endogenously excluded from the team, even if his own synergy is unchanged. This result has implications for optimal team composition and firm boundaries. |
| Keywords: | complementarities; contract theory; influence; multiple agents; principal-agent problem; synergies; teams |
| JEL: | D86 J31 J33 |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9559&r=cta |
| By: | Beyhaghi, Mehdi; Mahmoudi, Babak; Mohammadi, Ali |
| Abstract: | We provide empirical evidence of both (1) price dispersion and (2) credit rationing in the corporate loan market. We argue that these properties are caused by two factors: an adverse selection resulting from the information asymmetry between lenders and borrowers, and search frictions in matching borrowers with lenders. We develop a model of loan markets in which lenders post an array of heterogeneous contracts, then borrowers tradeoff terms of loan contracts and matching probability between themselves. We show that a unique separating equilibrium exists where each type of borrower applies to a certain type of contract. |
| Keywords: | loan contract, capital structure, debt heterogeneity, adverse selection, competitive search |
| JEL: | D86 G20 G21 G32 |
| Date: | 2013–09–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:49780&r=cta |
| By: | Halac, Marina (Department of Economics, University of Warwick); Yared, Pierre (Columbia University and NBER) |
| Abstract: | This paper studies the optimal level of discretion in policymaking. We consider a fiscal policy model where the government has time-inconsistent preferences with a present-bias towards public spending. The government chooses a fiscal rule to trade off its desire to commit to not overspend against its desire to have exibility to react to privately observed shocks to the value of spending. We analyze the optimal fiscal rule when the shocks are persistent. Unlike under i.i.d: shocks, we show that the ex-ante optimal rule is not sequentially optimal, as it provides dynamic incentives. The ex-ante optimal rule exhibits history dependence, with high shocks leading to an erosion of future scal discipline compared to low shocks, which lead to the reinstatement of discipline. The implied policy distortions oscillate over time given a sequence of high shocks, and can force the government to accumulate maximal debt and become immiserated in the long run. JEL classification: Institutions ; Asymmetric and Private Information ; Macroeconomic Polic ; Structure of Government ; Political Economy JEL codes: D02 ; D82 ; E6 ; H1 ; P16 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:warwec:1014&r=cta |
| By: | Alexander Zimper (Department of Economics, University of Pretoria) |
| Abstract: | Why do people choose bank deposit contracts over a direct participation in asset markets? In their seminal paper, Diamond and Dybvig (1983) answer this question by claiming that bank deposit contracts can implement allocations that are welfare superior to asset markets equilibria. The present paper demonstrates that this claim is false whenever the asset market participants are highly rational. |
| Keywords: | Demand deposit contract, Asset market, Asymmetric information |
| JEL: | G14 G21 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:201356&r=cta |
| By: | CANTA, Chiara (Université catholique de Louvain, Louvain School of Management and CORE, Belgium); LEROUX, Marie-Louise (Département des Sciences Economiques, UQAM, Canada; Université catholique de Louvain, CORE, Belgium) |
| Abstract: | This paper studies how congestion in the public health sector can be used as a redistributive tool. In our model, agents differ in income and they can obtain a health service either from a congested public hospital or from a non congested private one at a higher price. With pure in-kind redistribution, agents fail to internalize their impact on congestion, and the demand for the public hospital is higher than optimal. We show that under full information, the optimal redistribution and sorting across hospitals can be obtained using a lump-sum tax and a subsidy on the private hospital. If income is not observable but the social planner can assign agents across hospitals, the optimal congestion is higher than in the first best in order to relax incentive constraints. Finally, if agents can freely choose across hospitals, the optimal subsidy on the private hospital price may be negative or positive depending on the relative importance of redistribution and efficiency concerns. |
| Keywords: | optimal taxation, mixed health care systems, waiting times, income redistribution |
| JEL: | H21 H23 H44 I11 |
| Date: | 2013–09–11 |
| URL: | http://d.repec.org/n?u=RePEc:cor:louvco:2013041&r=cta |
| By: | Joe Cox (Portsmouth Business School); Daniel Kaimann (University of Paderborn) |
| Abstract: | Experience goods are characterized by information asymmetry and a lack of ex ante knowledge of product quality, such that credible and reliable external signals of product quality are likely to be highly valued. Due to their independence and expert reputations, professional critics therefore have the potential to significantly influence buyer behavior and hence product demand. In order to empirically verify the influence of critic reviews on market success, we analyze a sample of 1,480 video games and their sales figures between 2004 and 2010. We find strong evidence to suggest that reviews from professional critics have a significant effect upon sales and serve as a signal that helps consumer to overcome uncertainty and support the decision making process. The influence of professional critics on sales is also found to substantially outweigh that of word-of-mouth reviews from other consumers. |
| Keywords: | Signaling Theory, Information Asymmetry, Critics, Video Games |
| JEL: | C31 D82 L14 L82 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:pdn:wpaper:68&r=cta |