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on Contract Theory and Applications |
| By: | Berliant, Marcus; Chia-Ming, Yu |
| Abstract: | Agglomeration can be caused by asymmetric information and a locational signaling effect: The location choice of workers signals their productivity to potential employers. The cost of a signal is the cost of housing at that location. When workers' marginal willingness to pay for housing is negatively correlated with their productivity, only the core-periphery (partially stratified) equilibria are stable. When workers' marginal willingness to pay for housing and their productivity are positively correlated, there is no core-periphery equilibrium. The urban wage premium is explained when there is core-periphery equilibrium. Furthermore, location can at best be an approximate rather than a precise sieve for high-skill workers. |
| Keywords: | Agglomeration; Adverse Selection; Asymmetric Information; Locational Signaling |
| JEL: | D51 D82 R13 |
| Date: | 2014–04–19 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:55410&r=cta |
| By: | Siddhartha Bandyopadhyay; Manaswini Bhalla; Kalysan Chatterjee; Jaideep Roy |
| Abstract: | We analyze the Hotelling-Downs model of a winner-take-all elections with sequential entry where n > 2 'office-seeking' candidates with privately known qualities arrive in an order to announce platform commitments and voters receive partially informative exogenous signals about quality of each contestant. We characterize two-party equilibria when the order of entry is exogenously given. In these equilibria, entry can occur in any 'round' with positive probability: high quality candidates signal their type through showing ideological dissent with the voters while low quality ones randomize between (mis)-signaling quality through dissent and staying out. An interesting implication of this is that while the presence of a partially informative press can keep low quality candidates out of competition up to a certain degree, electoral competition improves voter's information about candidate types beyond what the press can reveal. However this endogenous mechanism of strategic information transmission leads to a political polarization. We then endogenize the order of entry to show that in general some high quality candidates enter early and others enter late while all low quality candidates either stay out or enter late. Moreover, while extremism continues to signal quality, there must be a gradual moderation in ideology although information revelation is non-monotonic in time with full revelation for early and late entrants and only partial revelation for intermediate entrants. |
| Keywords: | Sequential entry, Unobserved quality, Stratetic dissent, Polarization, Endogenous Order |
| JEL: | C72 D72 D82 |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:bir:birmec:14-04&r=cta |
| By: | Jan Boone; Rudy Douven |
| Abstract: | This paper compares the welfare effects of three ways in which health care can be organized: no competition (NC), competition for the market (CfM) and competition on the market (CoM) where the payer offers the optimal contract to providers in each case. We show that CfM is optimal if the payer either has contractible information on provider quality or can enforce cost efficient protocols. If such contractible information is not available NC or CoM can be optimal depending on whether patients react to decentralized information on quality differences between providers and whether payer’s and patients’ preferences are aligned. |
| JEL: | D82 L5 I11 |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpb:discus:275&r=cta |
| By: | Luigi Di Gaetano (Dipartimento di Economia e Impresa, Universita degli Studi di Catania); Isidoro Mazza (Department of Economics and Quantitative Methods, Universita degli Studi di Catania) |
| Abstract: | Severe budget cuts in the cultural sectors of many countries have spurred disparate suggestions for alternative sources available to public institutions. Deaccessioning may contribute to guarantee the survival of cultural institutions without serious negative impacts on the fruition of cultural goods. This paper addresses the consequences of a widespread deaccessioning on in-kind bequests to museums, by developing a sequential game with incomplete information. We look at the interactions between a donor and a museum. The latter could be either institutionally committed not to sale its collection, or free to sell part of its art endowment. Our main results show that when deaccessioning is allowed, contributions to museums of both types may decrease. Interestingly, public grants to museums cause a negative externality to the committed museum, which experiences a reduction in donations. Results provide intuitions also for the widespread resistance to deaccessioning of public museum directors, for their efforts to enforce common regulation, and also for the proliferation of private art museums. |
| Keywords: | deaccessioning; museums; asymmetric information; sequential game |
| JEL: | C73 Z11 D82 Z10 D83 |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:cue:wpaper:awp-01-2014&r=cta |
| By: | Rong Rong (Department of Economics, Weber State University); Daniel Houser (Interdisciplinary Center for Economic Science and Department of Economics, George Mason University) |
| Abstract: | Communication between departments within a firm may include deception. Theory suggests that telling lies in these environments may be strategically optimal if there exists a small difference in monetary incentives (Crawford and Sobel, 1982; Galeotti et al, 2012). We design a laboratory experiment to investigate whether agents with different monetary incentives in a network environment behave according to theoretical predictions. We found that players’ choices are consistent with the theory. That is, most communication within an incentive group is truthful and deception often occurs between subjects from different groups. These results have important implications for intra-organizational conflict management, demonstrating that in order to minimize deceptive communication between departments the firm may need to reduce incentive differences between these groups. Length: 19 |
| Keywords: | social networks, deception, strategic information transmission, experiments |
| JEL: | D85 D02 C92 |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:gms:wpaper:1046&r=cta |
| By: | Mandell, Svante (Department of Real Estate and Construction Management, Royal Institute of Technology); Nilsson, Jan-Eric (The Swedish National Road and Transport Research Institute (VTI)); Vierth, Inge (The Swedish National Road and Transport Research Institute (VTI)) |
| Abstract: | The impact of policy instruments supposed to reduce greenhouse gas emissions from road freight transports may seem smaller than expected. Using insights from economics and contract theory, the paper sorts out the (possible) instances of market failure in the freight transport market; operator market power, asymmetric information split incentives, and public goods. The primary limitations of standard policy instruments are demonstrated to be linked to unobservable information. Some of these may be reduced but not eliminated as information technologies develop, making it possible to observe, verify and provide contract-relevant information to the uninformed parties. There is little reason to believe that possible market failures present major limitations to the efficiency of economic instruments geared toward protecting the climate, other than possibly in the short run. |
| Keywords: | Freight transport; climate; greenhouse gas; policy instruments; asymmetric information; split incentives |
| JEL: | Q53 R40 R48 |
| Date: | 2014–04–10 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:kthrec:2014_003&r=cta |
| By: | Yi-Fang Liu (College of Management and Economics, China Center for Social Computing and Analytics and Centre d'Economie de la Sorbonne); Wei Zhang (College of Management and Economics, China Center for Social Computing and Analytics); Chao Xu (College of Management and Economics, China Center for Social Computing and Analytics); Jørgen Vitting Andersen (Centre d'Economie de la Sorbonne); Hai-Chuan Xu (College of Management and Economics, China Center for Social Computing and Analytics) |
| Abstract: | This paper studies the switching of trading strategies and its effect on the market volatility in a continuous double auction market. We describe the behavior when some uninformed agents, who we call switchers, decide whether or not to pay for information before they trade. By paying for the information they behave as informed traders. First, we verify that our model is able to reproduce some of the stylized facts in real financial markets. Next we consider the relationship between switching and the market volatility under different structures of investors. We find that there exists a positive relationship between the market volatility and the percentage of switchers. We therefore conclude that the switchers are a destabilizing factor in the market. However, for a given fixed percentage of switchers, the proportion of switchers that decide to buy information at a given moment of time is negatively related to the current market volatility. In other words, if more agents pay for information to know the fundamental value at some time, the market volatility will be lower. This is because the market price is closer to the fundamental value due to information diffusion between switchers. |
| Keywords: | Agent-based model, heterogeneity, switching behavior, market volatility. |
| JEL: | G11 G12 G14 |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:14031&r=cta |
| By: | Pintér, Miklós |
| Abstract: | Meier (2012) gave a "mathematical logic foundation" of the purely measurable universal type space (Heifetz and Samet, 1998). The mathematical logic foundation, however, discloses an inconsistency in the type space literature: a finitary language is used for the belief hierarchies and an infinitary language is used for the beliefs. In this paper we propose an epistemic model to fix the inconsistency above. We show that in this new model the universal knowledgebelief space exists, is complete and encompasses all belief hierarchies. Moreover, by examples we demonstrate that in this model the players can agree to disagree Aumann (1976)'s result does not hold, and Aumann and Brandenburger (1995)'s conditions are not sufficient for Nash equilibrium. However, we show that if we substitute selfevidence (Osborne and Rubinstein, 1994) for common knowledge, then we get at that both Aumann (1976)'s and Aumann and Brandenburger (1995)'s results hold. |
| Keywords: | Incomplete information game, Agreeing to disagree, Nash equilibrium, Epistemic game theory, Knowledge-belief space, Belief hierarchy, Common knowledge, Self-evidence, Nash equilibrium |
| JEL: | C70 C72 D80 D82 D83 |
| Date: | 2014–04–18 |
| URL: | http://d.repec.org/n?u=RePEc:cvh:coecwp:1530&r=cta |
| By: | Gary Charness; Francesco Feri; Miguel A. Meléndez-Jiménez; Matthias Sutter |
| Abstract: | In this paper, we describe a series of laboratory experiments that implement specific examples of a more general network structure and we examine equilibrium selection. Specifically, actions are either strategic substitutes or strategic complements, and participants have either complete or incomplete information about the structure of a random network. Since economic environments typically have a considerable degree of complementarity or substitutability, this framework applies to a wide variety of settings. The degree of equilibrium play is striking, in particular with incomplete information. Behavior closely resembles the theoretical equilibrium whenever this is unique; when there are multiple equilibria, general features of networks, such as connectivity, clustering, and the degree of the players, help to predict informed behavior in the lab. People appear to be strongly attracted to maximizing aggregate payoffs (social efficiency), but there are forces that moderate this attraction: 1) people seem content with (in the aggregate) capturing only the lion’s share of the efficient profits in exchange for reduced exposure to loss, and 2) uncertainty about the network structure makes it considerably more difficult to coordinate on a demanding, but efficient, equilibrium that is typically implemented with complete information. |
| Keywords: | Random networks, Incomplete information, Connectivity, Clustering, Strategic substitutes, Strategic complements, Experiment |
| JEL: | C71 C91 D03 D85 |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:inn:wpaper:2014-14&r=cta |
| By: | Uwe Dulleck; Rudolf Kerschbamer; Alexander Konovalov |
| Abstract: | In markets for credence goods sellers are better informed than their customers about the quality that yields the highest surplus from trade. This paper studies second-degree price-discrimination in such markets. It shows that discrimination regards the amount of advice offered to customers and that it leads to a different distortion depending on the main source of heterogeneity among consumers. If the heterogeneity is mainly in the expected cost of efficient service, the distortion involves overprovision of quality. By contrast, if consumers differ mainly in the surplus generated whenever the consumer's needs are met, the inefficiency involves underprovision of quality. |
| Keywords: | Price Discrimination, Credence Goods, Experts, Discounters, Distribution Channels |
| JEL: | L15 D82 D40 |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:inn:wpaper:2014-13&r=cta |
| By: | Agnes Bialecki (ENS LYON - École normale supérieure de Lyon - École Normale Supérieure (ENS) - Lyon); Eleonore Haguet (ENSAE - École Nationale de la Statistique et de l'Administration Économique - ENSAE ParisTech); Gabriel Turinici (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - CNRS : UMR7534 - Université Paris IX - Paris Dauphine) |
| Abstract: | We consider a two-period model in which a continuum of agents trade in a context of costly information acquisition and systematic heterogeneous expectations biases. Because of systematic biases agents are supposed not to learn from others' decisions. In a previous work under somehow strong technical assumptions a market equilibrium was proved to exist and the supply and demand functions were proved to be strictly monotonic with respect to the price. Here we extend these results under very weak technical assumptions. We also prove that the equilibrium price maximizes the trading volume and further additional properties (such as the antimonotonicity of the trading volume with respect to the marginal information price). |
| Keywords: | information acquisition; heterogeneous beliefs; heterogeneous estimations; Grossman-Stiglitz paradox; costly information |
| Date: | 2014–04–22 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-00723189&r=cta |
| By: | Cipriani, Marco (Federal Reserve Bank of New York); Martin, Antoine (Federal Reserve Bank of New York); McCabe, Patrick E. (Federal Reserve Bank of New York); Parigi, Bruno (Federal Reserve Bank of New York) |
| Abstract: | We build a model of a financial intermediary, in the tradition of Diamond and Dybvig (1983), and show that allowing the intermediary to impose redemption fees or gates in a crisis—a form of suspension of convertibility—can lead to preemptive runs. In our model, a fraction of investors (depositors) can become informed in advance about a shock to the return on the intermediary’s assets. Later, the informed investors learn the realization of the shock and choose their redemption behavior based on this information. We prove two results: First, there are situations in which informed investors would wait until the uncertainty is resolved before redeeming if redemption fees or gates cannot be imposed, but those same investors would redeem preemptively if fees or gates are possible. Second, we show that for the intermediary, which maximizes the expected utility only of its own investors, imposing gates or fees can be ex post optimal. These results have important policy implications for intermediaries that are vulnerable to runs, such as money market funds, because the preemptive runs that can be caused by the possibility of gates or fees may have damaging negative externalities. |
| Keywords: | runs; gates; fees; money market funds; banks |
| JEL: | G01 G21 G23 |
| Date: | 2014–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:670&r=cta |
| By: | Bruno S. Frey; Jana Gallus |
| Abstract: | Awards appear in various forms, ranging from the title "Employee of the Month" to prizes, decorations, and other honors. This contribution develops a theory designed to analyze the widely-observed phenomenon of award giving. We use signaling theory as a basis for our discussion. The perspectives of the giver, and of (potential) recipients, of awards are studied in a principal-agent framework. The analysis highlights conditions under which signaling failures are likely to arise and compares awards with monetary compensation. The paper informs management practice by presenting a systematic appraisal of the signaling functions of awards. It proposes under which conditions awards tend to raise performance, and when monetary compensation proves to be superior. |
| Keywords: | Awards; prizes; incentives; signaling theory; principal-agent framework |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:cra:wpaper:2014-04&r=cta |