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on Contract Theory and Applications |
| By: | Major, Iván |
| Abstract: | Governments must usually take policy decisions with an imperfect knowledge of the economic actors' type or the actors' effort level. These issues are addressed within the framework of classic adverse selection or moral hazard models. I discuss in this paper how would the government's and the economic actors' behavior change if relevant information is double asymmetric, that is, it is not just the government that has limited information about the agents' type or effort level, but the economic actors also lack perfect information about the government's trustworthiness. Using the modeling tools of mechanism design I prove in the paper, that government - as principal - is only capable of applying perverse incentives towards the economic agents: it punishes well-behaving agents while it rewards the badly behaving ones. I apply the theoretical models to the regulatory issues of network industries, and specifically to the ICT industry. -- |
| Keywords: | mechanism design,incentive theory,adverse selection,moral hazard,Bayesian games |
| JEL: | C73 D82 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:itse13:88522&r=cta |
| By: | Jean-Etienne de Bettignies (Queen); Jan Zabojnik (Queen) |
| Abstract: | We examine optimal information flows between a manager and a worker who is in charge of evaluating a parameter of interest, e.g. the value of a project. The manager may possesses information about the parameter, and, if informed, may divulge her information to the worker. We show that information sharing may weaken the worker's incentives and that, consequently, the manager may find it optimal to conceal her information from the worker. Moreover, the manager faces a time-inconsistency problem, which leads her to conceal her information more often than she would if she could commit to an information sharing policy. We build on these results to address issues related to authority in organizations. |
| Keywords: | Information non-disclosure, expert evaluation, agency costs, authority |
| JEL: | D21 D82 L23 |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:qed:wpaper:1321&r=cta |
| By: | Persson, Petra (Research Institute of Industrial Economics (IFN)) |
| Abstract: | When a decision-maker’s attention is limited, her decisions depend on what she focuses on. This gives interested parties an incentive to manipulate not only the substance of communication but also the decision-maker’s attention allocation. This paper models such attention manipulation. In its presence, competitive information supply can reduce the decision-maker’s knowledge by causing information overload. Further, a single information provider may deliberately induce information overload to conceal information. These findings, pertinent to consumer protection, suggest a role for rules that restrict communication, mandate not only the content but also the format of disclosure, and regulate product design. |
| Keywords: | Communication; Information Overload; Limited Attention; Persuasion; Disclosure; Complexity; Consumer Protection; Salience |
| JEL: | D18 D82 D83 M38 |
| Date: | 2013–12–13 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:iuiwop:0995&r=cta |
| By: | Wolfgang Kuhle |
| Abstract: | This paper relaxes the common prior assumption in the public and private information game of Morris and Shin (2000, 2004). For the generalized game, where the agent's prior expectations are heterogenous, it derives a sharp condition for the emergence of unique/multiple equilibria. This condition indicates that unique equilibria are played if player's public disagreement is substantial. If disagreement is small, equilibrium multiplicity depends on the relative precisions of private signals and subjective priors. Extensions to environments with public signals of exogenous and endogenous quality show that prior heterogeneity, unlike heterogeneity in private information, provides a robust anchor for unique equilibria. Finally, irrespective of whether priors are common or not, we show that public signals can ensure equilibrium uniqueness, rather than multiplicity, if they are sufficiently precise. |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1312.7860&r=cta |
| By: | Ariane Lambert-Mogiliansky (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - École des Hautes Études en Sciences Sociales (EHESS) - École des Ponts ParisTech (ENPC) - École normale supérieure [ENS] - Paris - Institut national de la recherche agronomique (INRA), EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris) |
| Abstract: | In this paper we investigate the properties of simple rules for reappointment aimed at holding a public official accountable and monitor his activity. The public official allocates budget resources to various activities which results in the delivery of public services to citizens. He has discretion over the use of resource so he can divert some of them for private ends. Because of a liability constraint, zero diversion can never be secured in all states. The optimal reappointment mechanism under complete information is shown to exhibit some leniency thus departing from the zero tolerance principle. Under asymmetric information (about the state), a rule with random verification in a pre-announced subset is shown to be optimal in a class of common rules. Surprisingly, those common rules make little use of hard information about service delivery when available. Similarly, PO's claim about his record is of no value to improve the performance of the examined rules. In contrast requesting that the PO defends his records publicly can be very useful if the service users are given the chance to refute false claims with cheap talk complaints: the first best complete information outcome can be approached in the absence of any observation by the manager of the accountability mechanism. |
| Keywords: | Accountability ; Verification ; Persuasion ; Monitoring ; Corruption |
| Date: | 2013–12–23 |
| URL: | http://d.repec.org/n?u=RePEc:hal:psewpa:halshs-00922092&r=cta |
| By: | Daniel Danau (University of Caen Basse-Normandie, CREM CNRS UMR 6211, France); Annalisa Vinella (Università degli Studi di Bari "Aldo Moro", Italy) |
| Abstract: | A government delegates a build-operate-transfer project to a private firm. At the contracting stage, the operating cost is unknown. The firm can increase the likelihood of facing a low cost (the good state) by exerting effort when building the infrastructure. Once this is in place, the firm learns the true cost and begins to operate. Under limited commitment, either the firm or the government may renege on the contract. Within this context, we explore how well a contract with a state-dependent duration performs, as compared to the more standard fixed-term contract. Under full commitment, the efficient allocation is decentralized, whether the contractual term is fixed or state-dependent. Under limited commitment, in situations where break-up of the partnership is little costly for the government, the efficient allocation can be decentralized only if it is stipulated that the duration of the contract will be longer in the good state than in the bad state. This result is at odds with the prescription of the literature on "flexible-term" contracts, which recommends a longer contractual length when the operating conditions are unfavourable. |
| Keywords: | Fixed-term contract, state-dependent duration, limited commitment, renegotiation, public-private partnerships |
| JEL: | D82 H57 H81 |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:tut:cremwp:201344&r=cta |
| By: | Stephen Holland; Andrew J. Yates |
| Abstract: | We analyze a novel method for improving the efficiency of pollution permit markets by optimizing the way in which emissions are exchanged through trade. Under full-information, it is optimal for emissions to exchange according to the ratio of marginal damages. However, under a canonical model with asymmetric information between the regulator and the sources of pollution, we show that these marginal damage trading ratios are generally not optimal, and we show how to modify them to improve efficiency. We calculate the optimal trading ratios for a global carbon market and for a regional nitrogen market. In these examples, the gains from using optimal trading ratios rather than marginal damage trading ratios range from substantial to trivial, which suggests the need for careful consideration of the structure of asymmetric information when designing permit markets. |
| JEL: | D82 H23 Q53 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19780&r=cta |
| By: | Biais, Bruno; Rochet, Jean-Charles; Woolley, Paul |
| Abstract: | We study the dynamics of an innovative industry when agents learn about its strength, i.e., the likelihood that it gets hit by negative shocks. Managers can exert risk-prevention export to mitigate the consequences of such shocks. As time goes by, if no shock occurs, con dence improves. This attracts managers to the innovative sector. But, when con dence becomes high, less managers exerting low risk-prevention export also enter. This accelerates the growth of the industry, while inducing a decline in risk-prevention. The longer the boom, the stronger the con dence, the larger the losses if a shock occurs. While the above dynamics arise in the fi rst best, with asymmetric information there is excessive entry of inefficient managers, earning informational rents at the expense of inneficient managers. This inflates the innovative sector and increases its vulnerability. |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:ide:wpaper:27747&r=cta |
| By: | Greiff, Matthias; Egbert, Henrik; Xhangolli, Kreshnik |
| Abstract: | Pay What You Want (PWYW) pricing has received considerable attention recently. Empirical studies show that when PWYW pricing is implemented buyers do not behave selfishly in a number of cases and that some sellers are able to use PWYW to increase turnover as well as profits. In this paper we present a theoretical model of buyer behavior under asymmetric information about production costs. Our model shows that information asymmetries provide an explanation for the results found in empirical studies. |
| Keywords: | PWYW pricing, information asymmetry, fairness, buyer behavior |
| JEL: | D4 M2 M3 |
| Date: | 2013–12–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:52766&r=cta |
| By: | Godfrey Charles-Cadogan; John A. Cole |
| Abstract: | We introduce a model in which a regulator employs mechanism design to embed her human capital beta signal(s) in a firm's capital structure, in order to enhance the value of her post career change indexed executive stock option contract with the firm. We prove that the agency cost of this revolving door behavior increases the firm's financial leverage, bankruptcy risk, and affects estimation of firm value at risk (VaR). |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1312.7346&r=cta |