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on Contract Theory and Applications |
| By: | Berg, Erland (University of Oxford); Ghatak, Maitreesh (London School of Economics); Manjula, R (ISEC); Rajasekhar, D (ISEC); Roy, Sanchari (University of Warwick) |
| 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 under taken across 151 villages in South India,local agents were hired to spread information about a public health insurance programme.Relative to flat 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: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:cge:wacage:134&r=cta |
| By: | Crawfordy, Gregory S (University of Zurich, CEPR and CAGE); Pavaniniz, Nicola (zUniversity of Zurich); Schivardi, Fabiano (xLUISS, EIEF and CEPR) |
| Abstract: | We measure the consequences of asymmetric information in the Italian market for small business lines of credit. Exploiting detailed, proprietary data on a random sample of Italian firms, the population of medium and large Italian banks, individual lines of credit between them, and subsequent individual defaults, we estimate models of demand for credit, loan pricing, loan use, and firm default based on the seminal work of Stiglitz and Weiss (1981) to measure the extent and consequences of asymmetric information in this market. While our data include a measure of observable credit risk comparable to that available to a bank during the application process, we allow firms to have private information about the underlying riskiness of their project. This riskiness influences banks’ pricing of loans as higher interest rates attract a riskier pool of borrowers, increasing aggregate default probabilities. Data on default, loan size, demand, and pricing separately identify the distribution of private riskiness from heterogeneous firm disutility from paying interest. Preliminary results suggest evidence of asymmetric information, separately identifying adverse selection and moral hazard. We use our results to quantify the impact of asymmetric information on pricing and welfare, and the role imperfect competition plays in mediating these effects. |
| Keywords: | Italian, asymmetric information |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:cge:wacage:167&r=cta |
| By: | Jess Benhabib; Pengfei Wang |
| Abstract: | We study a model where some agents have private information about risky asset returns and trade to obtain capital gains, while others acquire the risky asset and hold it to maturity, forming expectations of returns based on market prices. We show that under such a structure, in addition to fully revealing rational expectations equilibria, there exists a continuum of equilibrium prices consistent with rational expectations, where the the asset prices are subject to sunspot shocks. Such sunspot shocks can generate persistent fluctuations in asset prices that look like a random walk in an efficient market. |
| JEL: | D82 D83 G12 G14 |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20044&r=cta |
| By: | Dhillon, Amrita (Kings College, London); Peeters, Ronald (Maastrict); Muge Yukse, Ayse (Maastrict) |
| Abstract: | The use of social networks in the workplace has been documented by many authors, although the reasons for their widespread prevalence are less well known. In this paper we present evidence based on a lab experiment that suggests quite strongly that social networks are used by employers to reduce worker moral hazard. We capture moral hazard with a dictator game between the referrer and worker. The worker chooses how much to return under dierent settings of social proximity. Social proximity is captured using Facebook friendship information gleaned anonymously from subjects once they have been recruited. Since employers themselves do not have access to social connections, they delegate the decision to referrers who can select among workers with dierent degrees of social proximity to themselves. We show that employers choose referrals over anonymous hiring relatively more when they know that the referrer has access to friends, and are willing to delegate more often when the social proximity between referrer and worker is potentially higher. In keeping with this expectation, referrers also choose workers with a greater social proximity to themselves and workers who are closer to referrers indeed pay back more to the referrer. The advantage of the lab setting is that we can isolate directed altruism as the only reason for these results. |
| Keywords: | Eciency wage contracts, Moral hazard, Dictator game, Referrals, Altruism, Reciprocity, Directed altruism, Social proximity, Facebook, Experiment, Social networks, Strength of ties, Spot market. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:cge:wacage:183&r=cta |
| By: | Hunt Allcott; Richard Sweeney |
| Abstract: | With a large nationwide retailer, we run a natural field experiment to measure the effects of energy use information disclosure, rebates, and sales agent incentives on demand for energy efficient durable goods. Sales incentives and rebates are complementary, but information and sales incentives alone have statistically and economically insignificant effects. Sales agents comply only partially with the experiment, targeting information at the most interested consumers but not discussing energy efficiency with the disinterested majority. In follow-up surveys, most consumers are aware of the energy efficient model and may even overestimate its benefits, suggesting that imperfect information is not a major barrier to adoption in this context. |
| JEL: | D04 D12 L15 L51 L68 Q48 |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20048&r=cta |
| By: | Besancenot, Damien (University of Paris 13 and CEPN); Vranceanu, Radu (ESSEC Business School and THEMA) |
| Abstract: | In April 2013, all of the major academic publishing houses moved thousands of journal titles to an original hybrid model, under which authors of accepted papers can choose between an expensive open access track and the traditional track available only to subscribers. This paper argues that authors might use publication strategy as a quality signaling device. The imperfect information game between authors and readers presents several types of Perfect Bayesian Equilibria, including a separating equilibrium in which only authors of high quality papers are driven toward the open access track. The publishing house will choose the open-access publication fee that supports the emergence of the highest return equilibrium. Journal structures will evolve over time according to the journals' accessibility - quality profiles. |
| Keywords: | Academic publishing; Open access; Knowledge di¤usion; Imperfect information; Signaling |
| JEL: | A14 D52 L23 |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:essewp:dr-14006&r=cta |
| By: | Zhang, Lei (University of Warwick); Zhang, Lin (Southwestern University of Finance and Economics); Zheng, Yong (Southwestern University of Finance and Economics) |
| Abstract: | We use the global games approach to study key factors a?ecting the credit risk associated with roll-over of bank debt. When creditors are heterogenous, these include the extent of short-term borrowing and capital market liquidity for repo ?nancing. Speci?cally, in a model with a large institutional creditor and a continuum of small creditors independently making their roll-over decisions based on private information, we ?nd that increasing the proportion of short-term debt and/or decreasing market liquidity reduces the willingness of creditors to roll over. This raises credit risk in equilibrium. The presence of a large creditor does not always reduce credit risk, however, unless it is better informed. |
| Keywords: | Credit Risk; Coordination; Debt Crisis; Private information; Global games |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:cge:wacage:124&r=cta |
| By: | Jon X. Eguia (University of Bristol); Aniol Llorente-Saguer (Queen Mary University of London); Rebecca Morton (New York University); Antonio Nicolò (University of Manchester) |
| Abstract: | Games with imperfect information often feature multiple equilibria, which depend on beliefs off the equilibrium path. Standard selection criteria such as passive beliefs, symmetric beliefs or wary beliefs rest on ad hoc restrictions on beliefs. We propose a new selection criterion that imposes no restrictions on beliefs: we select the action profile that is supported in equilibrium by the largest set of beliefs. We conduct experiments to test the predictive power of the existing and our novel selection criteria in two applications: a game of vertical multi-lateral contracting, and a game of electoral competition. We find that our selection criterion outperforms the other selection criteria. |
| Keywords: | Equilibrium selection, Passive beliefs, Symmetric beliefs, Vertical contracting, Multiple equilibria, Imperfect information |
| JEL: | C72 D86 H41 D72 |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp717&r=cta |
| By: | Miller, Marcus (University of Warwick); Zhang, lei (University of Warwick) |
| Abstract: | The classic Diamond-Dybvig model of banking assumes perfect competition and abstracts from issues of moral hazard,hardly appropriate when considering modern UK banking.We therefore modify the classic model to ncorporate franchise values due to market power; and risk-taking by banks with limited liability.We go further to show how the capacity of franchis evalues to mitigate risk taking maybe undermined by the bailout option; with explicit analytical results provided for the case of extreme risk-aversion.After a brief discussion of how this may impact on the distribution of income, we outline the ways in which the Vickers Report seeks to remedy these problems. |
| Keywords: | Money and banking,Seigniorage,Risk-taking,Bailouts,Regulation |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:cge:wacage:135&r=cta |
| By: | Jonathan de Quidt |
| Abstract: | Empirically, labor contracts that financially penalize failure induce higher effort provision than economically identical contracts presented as paying a bonus for success, an effect attributed to loss aversion. This is puzzling, as penalties are infrequently used in practice. The most obvious explanation is selection: loss averse agents are unwilling to accept such contracts. I formalize this intuition, then run an experiment to test it. Surprisingly, I find that workers were 25 percent more likely to accept penalty contracts, with no evidence of adverse or advantageous selection. Consistent with the existing literature, penalty contracts also increased performance on the job by 0.2 standard deviations. I outline extensions to the basic theory that are consistent with the main results, but argue that more research is needed on the long-term effects of penalty contracts if we want to understand why firms seem unwilling to use them. |
| Keywords: | loss aversion, reference points, framing, selection, Mechanical Turk |
| JEL: | D03 J41 D86 |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:cep:stieop:52&r=cta |
| By: | Alexia Gaudeul (DFG RTG 1411, Friedrich-Schiller-Universität Jena); Paolo Crosetto (UMR GAEL INRA, Universite Pierre Mendes France, Grenoble); Gerhard Riener (DICE, Heinrich-Heine-Universität Düsseldorf) |
| Abstract: | We explore in an experiment what leads to the breakdown of partnerships. Subjects are assigned a partner and participate in a repeated public good game with stochastic outcomes. They can choose each period between staying in the public project or working on their own. There is excessive exit as subjects overestimate the likelihood their partner will leave. High barriers to exit thus improve welfare. We observe that exit is driven by failure within the common project but also by pay-off comparisons across options and beliefs about being exploited. Those considerations increasingly matter as we lower exit costs across treatments. |
| Keywords: | breakup, collaboration, cooperation, exit, imperfect public monitoring, moral hazard, partnerships, punishment, public good, repeated game, social risk, teams |
| JEL: | C23 C92 H41 |
| Date: | 2014–04–08 |
| URL: | http://d.repec.org/n?u=RePEc:jrp:jrpwrp:2014-012&r=cta |
| By: | Jeremy Atack; Matthew S. Jaremski; Peter L. Rousseau |
| Abstract: | We investigate the relationships of bank failures and balance sheet conditions with measures of proximity to different forms of transportation in the United States over the period from 1830-1860. A series of hazard models and bank-level regressions indicate a systematic relationship between proximity to railroads (but not to other means of transportation) and “good” banking outcomes. Although railroads improved economic conditions along their routes, we offer evidence of another channel. Specifically, railroads facilitated better information flows about banks that led to modifications in bank asset composition consistent with reductions in the incidence of moral hazard. |
| JEL: | N21 N71 |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20032&r=cta |
| By: | Xu, Xin |
| Abstract: | We propose new specifications that explicitly account for information noise in the input data of bankruptcy hazard models. The specifications are motivated by a theory of modeling credit risk with incomplete information (Duffie and Lando [2001]). Based on over 2 million firm-months of data during 1979-2012, we demonstrate that our proposed specifications significantly improve both in-sample model fit and out-of-sample forecasting accuracy. The improvements in forecasting accuracy are persistent throughout the 10-year holdout periods. The improvements are also robust to empirical setup, and are more substantial in cases where information quality is a more serious problem. Our findings provide strong empirical support for using our proposed hazard specifications in credit risk research and industry applications. They also reconcile conflicting empirical results in the literature. |
| Keywords: | Credit Risk Modeling, Incomplete Information, Hazard Models, Bankruptcy Forecast, Probability of Default (PD), Forecasting Accuracy, Intensity-based Models, Reduced-form Models, Duration Analysis, Survival Analysis |
| JEL: | C41 G17 G33 |
| Date: | 2013–05–28 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:55024&r=cta |
| By: | Sami Gharbi; Jean-Michel Sahut; Frédéric Teulon |
| Abstract: | The empirical evidence suggests that firms in high-tech industries exhibit high stock return volatility. In this paper, we conceive of the R&D investment intensity as a possible explanation for the stock volatility behavior in these industries. We suggest that R&D activities generate information asymmetry about the prospects of the firm and make its stock riskier. Relying on Panel data models, we investigate this relationship for French high-tech firms. We find out a strong positive relationship between stock return volatility and R&D investment intensity. This finding suggests that R&D intensive firms should implement an efficient information disclosure policy to reduce information asymmetry and to avoid excessive stock return volatility. |
| Keywords: | R&D; Idiosyncratic idiosyncratic volatility; Riskrisk; Asymmetric asymmetric information; Stock stock return; Innovationinnovation; Highhigh-tech firms |
| Date: | 2014–04–10 |
| URL: | http://d.repec.org/n?u=RePEc:ipg:wpaper:2014-218&r=cta |
| By: | Alejandro Francetich; David Kreps |
| Abstract: | A decision maker faces an unobserved state of nature. She updates her prior on the state based on the realizations of a signal. In this note, we show that the expected posterior on any given state, taking expectation under the conditional distribution of the signal on this same state, is never lower than the prior on said state. In other words, the expected posterior probability on the true state is never lower than the prior on this state, regardless of what the true state is. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:igi:igierp:514&r=cta |
| By: | Harrison, Mark (Department of Economics and CAGE, University of Warwick Centre for Russian and East European Studies, University of Birmingham); Zaksauskienė, Inga (Vilnius University) |
| Abstract: | We provide the first thick description of the KGB’s counter-intelligence function in the Soviet command economy. Based on documentation from Lithuania, the paper considers KGB goals and resources in relation to the supervision of science, industry, and transport; the screening of business personnel; the management of economic emergencies; and the design of economic reforms. In contrast to a western market regulator, the role of the KGB was to enforce secrecy, monopoly, and discrimination. As in the western market context, regulation could give rise to perverse incentives with unintended consequences. Most important of these may have been adverse selection in the market for talent. There is no evidence that the KGB was interested in the costs of its regulation or in mitigating the negative consequences. |
| Keywords: | communism, command economy, discrimination, information, |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:cge:wacage:170&r=cta |
| By: | Thierry Warin; Robert E. Prasch |
| Abstract: | In the wake of the worst financial crisis since 1929, economists are revisiting the received understanding of how financial markets and institutions actually operate. This paper aims to contribute to this reexamination. It builds upon the traditional and widely-accepted mean-variance approach to the processing of information under conditions of risk while reconsidering an inadequately contemplated premise: the actual organization of the financial market. Now, a lot has been said about perverse incentives and contracting arrangements, firms with oligopolistic power, the pricing and market advantages of being too big to fail, and the associated inefficiencies of the regulatory and supervision systems. While we believe that much of that work is valid, we also believe that too little has been done to meld modern portfolio theory (MPT) with insights that can be drawn from recent developments in Industrial Organization. In the model presented here, the MPT finds its place through the "coordination" mechanism, which is the transmission of financial information among agents. The IO perspective finds its place in our model through a variable capturing the fragility of the system: the probability that the quality of information can itself be altered by the system’s "complexity," which in its extreme from can be described as "opacity." |
| Keywords: | systemic risk, specific risk, systematic risk, financial industry, modern portfolio theory, complexity, opacity, Minsky moment, complex systems, |
| Date: | 2013–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:cir:cirwor:2013s-29&r=cta |