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on Contract Theory and Applications |
| By: | Prat, Julien (CREST) |
| Abstract: | This paper studies the design of optimal contracts in dynamic environments where agents learn by doing. We derive a condition under which contracts are fully incentive compatible. A closed-form solution is obtained when agents have CARA utility. It shows that human capital accumulation strengthens the power of incentives and allows the principal to provide the agent with better insurance against transitory risks. |
| Keywords: | human capital, principal agent problem, moral hazard |
| JEL: | D82 D83 J24 J41 |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp7961&r=cta |
| By: | Kazumi Hori (College of Economics, Ritsumeikan University) |
| Abstract: | This paper investigates how a buyer and a seller exchanging two goods should write the contract, where the seller makes sequences of unobservable relation-specific investments and the buyer privately learns valuations for goods which are stochastically influenced by the investments and these two types of asymmetric information cause inefficiency in trading. Three types of contract structures are possible. In a dynamic contract, the goods are traded sequentially and the order for the second good can be canceled to restore efficiency for the first good. In separate contracts, two goods are treated independently, whereas the two goods are bundled as a single good in bundled contracts. It will be shown that the dynamic contract is suboptimal and that the second-best contract is either a separate or a bundle contract, depending on the costs of investments. |
| Keywords: | bilateral trading, cooperative investment, dynamic contract, hidden action, hidden information. |
| JEL: | C72 D23 D82 D86 |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:kyo:wpaper:888&r=cta |
| By: | Erlend Berg; Maitreesh Ghatak; R Manjula; D Rajasekhar; Sanchari Roy |
| Abstract: | This paper studies the interaction of incentive pay and social distance in the dissemination of information. We analyse theoretically as well as empirically the effect of incentive pay when agents have pro-social objectives, but also preferences over dealing with one social group relative to another. In a randomised field experiment undertaken across 151 villages in South India, local agents were hired to spread information about a public health insurance programme. Relative to at pay, incentive pay improves knowledge transmission to households that are socially distant from the agent, but not to households similar to the agent. |
| Keywords: | public services, information constraints, incentive pay, social proximity, knowledge transmission |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:bri:cmpowp:13/316&r=cta |
| By: | Kaustav Das (Department of Economics, University of Exeter) |
| Abstract: | This paper considers a two-armed bandit problem with one safe arm and one risky arm. The risky arm if good, can potentially experience two kinds of arrivals. One is publicly observable and the other is private to the agent who experiences it. The safe arm experiences publicly observable arrivals according to a given intensity. Private arrivals yield no payoff. Only the first publicly observed arrival(in any of the arms) yields a payo of 1 unit. Players start with a common prior about the quality of the risky arm. It has been shown that in a particular kind symmetric equilibrium, conditional on no arrival players tend to experiment too much along the risky arm if they start with too high a prior and experiment too less if they start with a low prior. |
| Keywords: | Two-armed Bandit, R&D competition, Duplication, Learning. |
| JEL: | C73 D83 O31 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:exe:wpaper:1404&r=cta |
| By: | Anya Savikhin Samek (School of Human Ecology, University of Wisconsin-Madison); Roman M. Sheremeta (Weatherhead School of Management, Case Western Reserve University and the Economic Science Institute, Chapman University,) |
| Abstract: | Studies show that identifying contributors significantly increases contributions to public goods. In practice, however, viewing identifiable information is costly, which may discourage people from accessing such information. To address this question, we design a public goods experiment in which participants can pay a fee to view information about identities and corresponding contributions of their group members. We then compare this to a treatment in which there is no identifiable information, and a treatment in which all contributors are freely identified. Our main findings are that: (1) contributions in the treatment with costly information are as high as those in the treatment with free information, (2) participants choose to view the information about 10% of the time, and (3) being a high contributor is positively correlated with choosing to view identifiable information about others. Thus, it seems that having access to information is important even when such information is rarely viewed. Or findings have practical implications for non-profit organizations with a large pool of donors and for designers of recognition systems, especially in online communities with many participants. |
| Keywords: | public-goods, information, experiments |
| JEL: | C72 C91 H41 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:chu:wpaper:14-04&r=cta |
| By: | Wanda Mimra (ETH Zurich, Switzerland); Alexander Rasch (Duesseldorf Institute for Competition Economics (DICE) and University of Cologne); Christian Waibel (ETH Zurich, Switzerland) |
| Abstract: | We experimentally investigate the role of second opinions in markets where experts like doctors both diagnose and provide the services. Experts may exploit their informational advantage over customers and overtreat by providing a more costly and expensive treatment than necessary. We show that introducing costly second opinions significantly reduces the level of overtreatment. Market efficiency rises as the reduction in treatment costs—due to less overtreatment—exceeds the increase in incurred search costs. Lowering customers’ search costs leads to significantly more second opinions, however, the overtreatment level does not decrease. |
| Keywords: | Credence goods; Experts; Second opinion; Overtreatment; Search costs. |
| JEL: | D82 L15 |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:eth:wpswif:14-192&r=cta |
| By: | Dong, Baomin; Fu, Shihe; Gong, Jiong; Fan, Hanwen |
| Abstract: | This paper develops a signaling theory where brain drain as well as the opposite of brain drain, a phenomenon we call “lame-drain” can result. In particular, we assume there are three types of agents according to their intrinsic abilities; education (with endogenous intensity) consists of two stages: undergraduate and graduate. There are two types of jobs: entry level and managerial. It is shown that under some circumstances the equilibrium is semi-pooling where the medium type chooses to work after undergraduate education while (a fraction of) both high and low types pursue graduate studies at home and abroad. Some high and low ability students return to work in the indigenous country in equilibrium. However, our model differs from the traditional brain drain models in that some low ability agents also go abroad in equilibrium and work in the host country after graduation, resulting in the recipient country hiring low ability agents, a phenomenon we call lame-drain. We then provide empirical evidence that lame-drain is indeed happening using U.S. Census data. |
| Keywords: | Brain Drain; Lame Drain; Signalling |
| JEL: | C72 F22 J61 |
| Date: | 2014–02–14 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:53825&r=cta |
| By: | Bragelien, Iver (Dept. of Business and Management Science, Norwegian School of Economics); Impink, Joost (Fisher School of Accounting, Warrington College of Business Administration, University of Florida) |
| Abstract: | We investigate the relevance of relationship-specificity in explaining firm performance and firm value. First, we use an incomplete contracts model to derive hypotheses on how relationship-specificity interacts with bargaining power and growth. And, second, we test these hypotheses on US data for the period 1998 to 2012. We use contract intensity introduced by Nunn (2007) to measure relationship-specificity at the industry level. Relationship-specific investments are considered to be low when a company’s inputs are sold on an exchange and high otherwise. Using size as a measure for bargaining power, we find support for our hypothesis that the benefits of bargaining power increase with relationship-specificity. We also find that growth has a stronger impact on firm value when relationship-specificity is high, indicating that the continuation value of the relationship matters. |
| Keywords: | Relationship-specificity; firm performance; bargaining power; growth |
| JEL: | D23 L14 L25 |
| Date: | 2014–02–20 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:nhhfms:2014_004&r=cta |
| By: | Sandro Casal; Luigi Mittone |
| Abstract: | When the phenomenon of tax evasion is discussed, both scholars and authorities agree on the fact that, although essential, classical enforcements are not enough to ensure tax compliance: some other forms of incentives must be adopted. The paper’s aim is to experimentally test the role of different non- monetary incentives for tax compliance: participants have been treated with different experimental conditions, which differ in the role played by anonymity. Indeed, subjects have been informed on the possibility of revealing their identity and their choices through the publication of their pictures, as a consequence of the result of the auditing process. As expected, anonymity plays an important role in the decision to pay taxes; in addition, we find that negative non-monetary incentive increases tax compliance more effectively than positive non-monetary incentive. We find also that the effect of these non-monetary incentives is mitigated, when too many information are made available. Finally, results show that, when evasion is made public, tax-dodgers are willing to pay in order to keep secret their cheating behavior and avoid public shame. |
| Keywords: | Tax Evasion, Non-monetary incentives, Anonymity, Experimental Economics |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:trn:utwpce:1401&r=cta |
| By: | Alexander Radygin (Gaidar Institute for Economic Policy); Revold Entov (Gaidar Institute for Economic Policy) |
| Abstract: | The article focuses on the analysis of the evolution of contemporary theoretic approaches to the choice of an optimal form of ownership, and the corresponding estimation of privatization in the context of the advantages and disadvantages of the public and private sectors of the national economy. Various interpretations of the fundamental privatization theorem are considered: based on the principal-agent relationship; based on the comparison of the structure of information flows; the combination of ownership rights and contractual rights; consideration of sociopolitical factors, etc. The latest trends in Russia’s de-statization policy in 2010-2013 are analyzed in the context of ‘reluctant privatization’, with special emphasis on the asymmetry between the statization and privatization processes. |
| Keywords: | privatization, government failures, state policy, public choice, allocational efficiency, information |
| JEL: | H82 K11 L32 L33 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:gai:wpaper:0087&r=cta |
| By: | Hugh Macartney |
| Abstract: | This paper provides the first evidence that value-added education accountability schemes induce dynamic distortions. Extending earlier dynamic moral hazard models, I propose a new test for ratchet effects, showing that classroom inputs are distorted less when schools face a shorter horizon over which they can influence student performance. I then exploit grade span variation using rich educational data to credibly identify the extent of dynamic gaming, finding compelling evidence of ratchet effects based on a triple-differences approach. Further analysis indicates that these effects are driven primarily by effort distortions, with teacher reallocations playing a secondary role. |
| JEL: | D82 I21 J33 M52 |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19915&r=cta |