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on Contract Theory and Applications |
| By: | Michiel Bijlsma; Gijsbert Zwart |
| Abstract: | We study how the possibility of renegotiation affects optimal bail-out policies for countries under asymmetric information on a country's cost of reforms. To that end, we solve the Bellman equation describing the optimal bail-out mechanism in a multiple-period principal-agent model with adverse selection and renegotiation. In each period, the agent can incrementally raise its level of reforms. The principal values these reforms and negotiates with the agent over reforms and payments. We show that the first-best efficient outcome is reached after two periods when spill-over benefits are quadratic. The principal can use market discipline to improve the outcome. Market discipline can lower the rents the principal has to pay and speed up the renegotiation process. |
| JEL: | D82 F34 F51 |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpb:discus:261&r=cta |
| By: | : Kostas Koufopoulos; : Roman Kozhan |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:wbs:wpaper:wpn13-13&r=cta |
| By: | : Arie E. Gozluklu |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:wbs:wpaper:wpn12-05&r=cta |
| By: | Aviad Heifetz; Willemien Kets |
| Abstract: | In an important paper, Weinstein and Yildiz (2007) show that if players have an innite depth of reasoning and this is commonly believed, types generically have a unique rationalizable action in games that satisfy a richness condition. We show that this result does not extend to environments where players may have a finite depth of reasoning, or think it is possible that the other player has a finite depth of reasoning, or think that the other player may think that is possible, and so on, even if this so-called "grain of naivete" is arbitrarily small. More precisely, we show that even if there is almost common belief in the event that players have an infinite depth of reasoning, there are types with multiple rationalizable actions, and the same is true for "nearby" types. Our results demonstrate that both uniqueness and multiplicity are robust phenomena when we relax the assumption that it is common belief that players have an infinite depth, if only slightly. |
| Keywords: | Bounded rationality, finite depth of reasoning, global games, higher-order beliefs, generic uniqueness, robust multiplicity JEL Classification: C700, C720, D800, D830 |
| Date: | 2013–12–11 |
| URL: | http://d.repec.org/n?u=RePEc:nwu:cmsems:1573&r=cta |
| By: | Katharina Hilken; Stephanie Rosenkranz; Kris De Jaegher; Marc Jegers |
| Abstract: | The paper investigates the effect of four differently framed payment contracts on the agent's effort provision and performance in a real effort experiment. The four incentive payments are framed as a base wage and bonuses (one immediately pays bonuses, the other only after an initial performance-independent part), penalties or a combination of bonuses and penalties. The base wage that is offered, induces the reference point. The participants provide real effort and are paid for finding pairs in a customized Memory game. The bonus-only frame elicits the highest effort, whereas frames with penalties lag behind. Ability positively complements the effect of effort on performance. The combination of penalties and bonuses minimises the costs of the principal only for low levels of performance employing heterogeneous agents. For higher performance levels, framing a base wage with bonuses is cost-effective. |
| Keywords: | Real Effort Experiment, Optimal Payment Scheme, Principal-Agent Relationship, Ability, Bonus, Penalty |
| JEL: | M52 J33 C91 |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:use:tkiwps:1315&r=cta |
| By: | : Constantinos Antoniou; : Glenn W. Harrison; : Morten I. Lau; : Daniel Read |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:wbs:wpaper:wpn13-02&r=cta |