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on Contract Theory and Applications |
| By: | Krähmer, Daniel; Strausz, Roland |
| Abstract: | We study ex post information rents in sequential screening models where the agent receives private ex ante and ex post information. The principal has to pay ex post information rents for preventing the agent to coordinate lies about his ex ante and ex post information. When the agent's ex ante information is discrete, these rents are positive, whereas they are zero in continuous models. Consequently, full disclosure of ex post information is generally suboptimal. Optimal disclosure rules trade off the benefits from adapting the allocation to better information against the effect that more information aggravates truth-telling. |
| Keywords: | information disclosure; information rents; sequential screening |
| JEL: | D82 H57 |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9927&r=cta |
| By: | Lagerlöf, Johan N. M.; Schottmüller, Christoph |
| Abstract: | We study a monopoly insurance model with endogenous information acquisition. Through a continuous effort choice, consumers can determine the precision of a privately observed signal that is informative about their accident risk. The equilibrium effort is, depending on parameter values, either zero (implying symmetric information) or positive (implying privately informed consumers). Regardless of the nature of the equilibrium, all offered contracts, also at the top, involve underinsurance. The reason is that underinsurance at the top discourages information gathering. We identify a sorting effect that explains why the insurer wants to discourage information acquisition. Moreover, a public policy that decreases the information gathering costs can hurt both parties. Lower information gathering costs can harm consumers because the insurer adjusts the optimal contract menu in an unfavorable manner. |
| Keywords: | adverse selection; asymmetric information; information acquisition; insurance; screening |
| JEL: | D82 I13 |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9774&r=cta |
| By: | Shin, Dongsoo; Strausz, Roland |
| Abstract: | Using an agency model, we show how delegation, by generating additional private information, improves dynamic incentives under limited commitment. It circumvents ratchet effects and facilitates the revelation of persistent private information through two effects: a play-hardball effect, which mitigates an efficient agent's ratchet incentive, and a carrot effect which reduces an inefficient agent's take-the-money-and-run incentive. Although delegation entails a loss of control, it is optimal when uncertainty about operational efficiency is large. Moreover, delegation is more effective with production complementarity. We also consider different modes of commitment to yield insights into optimal organizational boundaries. |
| Keywords: | Agency; Delegation; Dynamic Incentives; Limited Commitment |
| JEL: | D82 D86 L22 |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9929&r=cta |
| By: | Lagerlöf, Johan N. M.; Schottmüller, Christoph |
| Abstract: | What are the welfare effects of a policy that facilitates for insurance customers to privately and covertly learn about their accident risks? We endogenize the information structure in Stiglitz's classic monopoly insurance model. We first show that his results are robust: For a small information acquisition cost c, the consumer gathers information and the optimal contracts are close to the ones in the Stiglitz model. If c is so low that the consumer already gathers information (c c*, marginally reducing c hurts the insurer and weakly benefits the consumer. Paradoxically, a reduction in c that is “successful,” meaning that the consumer gathers information after the reduction but not before it, can hurt both parties. The reasons for this are that, after the reduction, (i) the cost is actually incurred and (ii) the contracts can be more distorted. |
| Keywords: | adverse selection; asymmetric information; information acquisition; insurance; screening |
| JEL: | D82 I13 |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9753&r=cta |
| By: | Ulbricht, Robert |
| Abstract: | The paper studies a model of delegated search. The distribution of search revenues is unknown to the principal and has to be elicited from the agent in order to design the optimal search policy. At the same time, the search process is unobservable, requiring search to be self-enforcing. The two information asymmetries are mutually enforcing each other; if one is relaxed, delegated search is efficient. With both asymmetries prevailing simultaneously, search is almost surely inefficient (it is stopped too early). Second-best remuneration is shown to optimally utilize a menu of simple bonus contracts. In contrast to standard adverse selection problems, indirect nonlinear tariffs are strictly dominated. |
| Keywords: | adverse selection; bonus contracts; delegated search; moral hazard; optimal stopping. |
| JEL: | D82 D83 D86 C72 |
| Date: | 2014–03–11 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:462&r=cta |
| By: | Francesc Dilmé (Department of Economics, University of Bonn) |
| Abstract: | Asymmetric information is an important source of inefficiency when an asset (such as a firm) is transacted. The two main sources of this asymmetry are the unobserved idiosyncratic characteristics of the asset (such as future profitability) and unobserved idiosyncratic choices (like secret price cuts). Buyers may use noisy signals (such as sales) in order to infer actions and characteristics. In this situation, does the seller prefer to release information fast or slowly? Is it incentive compatible? When the market is pessimistic, is it better to give up or keep signaling? We introduce hidden actions in a dynamic signaling model in order to answer these questions. Separation is found to be fast in equilibrium when sending highly informative signals is more efficient than sending lowly informative signals. When the market is pessimistic about the quality of the asset, depending on the cost structure, the seller either “gives-up” by stopping signaling, or the seller “rushes-out” by increasing the informativeness of the signal. We find that the unobservability of the action causes equilibrium effort to be too low and the seller to stop signaling too early. The model can be applied to education where grades depend on students’ effort, which is endogenously related to their skills. |
| Keywords: | Dynamic Signaling, Dynamic Moral Hazard, Endogenous Effort |
| JEL: | D82 D83 C73 J24 |
| Date: | 2014–05–18 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:14-019&r=cta |
| By: | Bertola, Giuseppe; Koeniger, Winfried |
| Abstract: | We consider an economy where individuals privately choose effort and trade competitively priced securities that pay off with effort-determined probability. We show that if insurance against a negative shock is sufficiently incomplete, then standard functional form restrictions ensure that individual objective functions are optimized by an effort and insurance combination that is unique and satisfies first- and second-order conditions. Modeling insurance incompleteness in terms of costly production of private insurance services, we characterize the constrained inefficiency arising in general equilibrium from competitive pricing of non-exclusive financial contracts. |
| Keywords: | Constrained efficiency; First-order approach; Hidden action; Principal agent |
| JEL: | D81 D82 E21 |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9864&r=cta |
| By: | Kosfeld, Michael; Von Siemens, Ferdinand |
| Abstract: | Team production is a frequent feature of modern organizations. Combined with team incentives, team production can create externalities among workers, since their utility upon accepting a contract depends on their team’s performance and therefore on their colleagues’ productivity. We study the effects of such externalities in a competitive labor market if workers have private information on their productivity. We find that in any competitive equilibrium there must be Pareto-efficient separation of workers according to their productivity. We further find that externalities facilitate equilibrium existence, where under a particular condition on workers’ indifference curves even arbitrarily small externalities guarantee equilibrium existence. |
| Keywords: | adverse selection; competition; externality; team production |
| JEL: | D24 D82 J30 L22 |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9833&r=cta |
| By: | Alain Trannoy (Aix-Marseille Universite (Aix-Marseille School of Economics) CNRS EHESS); Robert Gary-Bobo (CREST-ENSAE) |
| Abstract: | We characterize the set of second-best optimal "menus" of student-loan contracts in a simple economy with risky labour-market outcomes, adverse selection, moral hazard and risk aversion. The model combines student loans with an elementary optimal income-tax problem. The second-best optima provide incomplete insurance because of moral hazard; they typically involve cross-subsidies between students. Generically, optimal loan repayments cannot be decomposed as the sum of an income tax, depending only on earnings, and a loan repayment, depending only on education. Therefore, optimal loan repayments must be income-contingent, or the income tax must comprise a graduate tax. The interaction of adverse selection and moral-hazard, i.e., self-selection constraints and effort incentives, determines an equal treatment property; the expected utilities of different types of students are equalized at the interim stage, conditional on the event of academic success (i.e., graduation). But individuals are ex ante unequal because of differing probabilities of success, and ex post unequal, because the income tax trades off incentives and insurance (redistribution). |
| Keywords: | student loans, graduate tax, adverse selection, moral hazard, risk aversion |
| Date: | 2014–04–02 |
| URL: | http://d.repec.org/n?u=RePEc:aim:wpaimx:1416&r=cta |
| By: | Fiocco, Raffaele; Guo, Gongyu |
| Abstract: | In an industry where regulated firms interact with unregulated suppliers, we investigate the welfare effects of a merger between regulated firms when cost synergies are uncertain before the merger and their realization becomes private information of the merged firm. The optimal merger policy trades off potential cost savings against regulatory distortions from informational problems. We show that, as a consequence of this trade-off, more intense competition in unregulated segments of the market induces a more lenient merger policy. The regulated firms' diversification into a competitive segment of the market can lead to a softer merger policy when competition is weaker. |
| Keywords: | asymmetric information; competition; efficiency gains; mergers; regulation. |
| JEL: | D82 L43 L51 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:464&r=cta |
| By: | Edmans, Alex; Goldstein, Itay; Zhu, John |
| Abstract: | This paper studies multi-agent optimal contracting with cost synergies. We model synergies as the extent to which effort by one agent reduces his colleague's marginal cost of effort. An agent's pay and effort depend on the synergies he exerts, the synergies his colleagues exert on him and, surprisingly, the synergies his colleagues exert on each other. It may be optimal to "over-work" and "over-incentivize" a synergistic agent, due to the spillover effect on his colleagues. This result can rationalize the high pay differential between CEOs and divisional managers. An increase in the synergy between two particular agents can lead to a third agent being endogenously excluded from the team, even if his own synergy is unchanged. This result has implications for optimal team composition and firm boundaries. |
| Keywords: | complementarities; Contract theory; influence.; multiple agents; principal-agent problem; synergies; teams |
| JEL: | D86 J31 J33 |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9747&r=cta |
| By: | Bhaskar, Venkataraman |
| Abstract: | We study dynamic moral hazard where principal and agent are symmetrically uncertain about job difficulty. Since effort is unobserved, shirking leads the principal to believe that the job is hard, increasing the agent's continuation value. So deterring shirking requires steeper incentives, which induce the agent to over-work today, since he can quit if the principal believes that the job is easy. With continuous effort choices, no interior effort is implementable in the first period. The agent's continuation value function is non-differentiable and convex, since the principal makes the agent indifferent between his discrete (participation) choices in the second period. The problem can be solved if the agent's participation decision is made continuous, or if there are long-term commitments, and we provide conditions for the first order approach to work. However, the impossibility result recurs in other agency models that combine discrete and continuous choices. |
| Keywords: | envelope theorem; first-order approach; learning; moral hazard; ratchet effect |
| JEL: | D83 D86 |
| Date: | 2014–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9956&r=cta |
| By: | Herweg, Fabian; Karle, Heiko; Müller, Daniel |
| Abstract: | We consider a simple trading relationship between an expectation-based loss-averse buyer and profit-maximizing sellers. When writing a long-term contract the parties have to rely on renegotiations in order to ensure materially efficient trade ex post. The type of the concluded long-term contract affects the buyer's expectations regarding the outcome of renegotiation. If the buyer expects renegotiation always to take place, the parties are always able to implement the materially efficient good ex post. It can be optimal for the buyer, however, to expect that renegotiation does not take place. In this case, a good of too high quality or too low quality is traded ex post. Based on the buyer's expectation management, our theory provides a rationale for ``employment contracts'' in the absence of non-contractible investments. Moreover, in an extension with non-contractible investments, we show that loss aversion can reduce the hold-up problem. |
| Keywords: | Behavioral Contract Theory; Expectation-Based Loss Aversion; Incomplete Contracts; Renegotiation |
| JEL: | C78 D03 D86 |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9874&r=cta |
| By: | Hottenrott H.; Czarnitzki D.; Hall B.H. (UNU-MERIT) |
| Abstract: | Information about the success of a new technology is usually held asymmetrically between the research and development RD-performing firm and potential lenders and investors. This raises the cost of capital for financing RD externally, resulting in financing constraints on RD especially for firms with limited internal resources. Previous literature provided evidence for start-up firms on the role of patents as signals to investors, in particular to Venture Capitalists. This study adds to previous insights by studying the effects of firms patenting activity on the degree of financing constraints on RD for a panel of established firms. The results show that patents do indeed attenuate financing constraints for small firms where information asymmetries may be particularly high and collateral value is low. Larger firms are not only less subject to financing constraints, but also do not seem to benefit from a patent quality signal. Keywords Patents, Quality Signal, Research and Development, Financial Constraints, Innovation Policy |
| Keywords: | Innovation and Invention: Processes and Incentives; Management of Technological Innovation and R&D; Technological Change: Government Policy; |
| JEL: | O31 O32 O38 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:unm:unumer:2014013&r=cta |
| By: | Edmans, Alex; Heinle, Mirko; Huang, Chong |
| Abstract: | This paper models the effect of disclosure on real investment. We show that, even if the act of disclosure is costless, a high-disclosure policy can be costly. Some information ("soft") cannot be disclosed. Increased disclosure of "hard" information augments absolute information and reduces the cost of capital. However, by distorting the relative amounts of hard and soft information, increased disclosure induces the manager to improve hard information at the expense of soft, e.g. by cutting investment. Investment depends on asset pricing variables such as investors' liquidity shocks; disclosure depends (non-monotonically) on corporate finance variables such as growth opportunities and the manager's horizon. Even if a low disclosure policy is optimal to induce investment, the manager may be unable to commit to it. If hard information turns out to be good, he will disclose it regardless of the preannounced policy. Government intervention to cap disclosure can create value, in contrast to common calls to increase disclosure. |
| Keywords: | cost of capital.; Disclosure; financial and real efficiency; investment; managerial myopia |
| JEL: | G18 G31 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9637&r=cta |
| By: | Schmitz, Patrick W |
| Abstract: | The government wants two tasks to be performed. In each task, unobservable effort can be exerted by a wealth-constrained private contractor. If the government faces no binding budget constraints, it is optimal to bundle the tasks. The contractor in charge of both tasks then gets a bonus payment if and only if both tasks are successful. Yet, if the government has only a limited budget, it may be optimal to separate the tasks, so that there are two contractors each in charge of one task. In this case, high efforts in both tasks can be implemented with smaller bonus payments. |
| Keywords: | bundling; limited liability; moral hazard; procurement contracts; public goods provision |
| JEL: | D86 H12 H57 L24 L33 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9676&r=cta |
| By: | Huberman, Gur; Repullo, Rafael |
| Abstract: | We present a model of the maturity of a bank's uninsured debt. The bank borrows funds and chooses afterwards the riskiness of its assets. This moral hazard problem leads to an excessive level of risk. Short-term debt may have a disciplining effect on the bank's risk-shifting incentives, but it may lead to inefficient liquidation. We characterize the conditions under which short-term and long-term debt are feasible, and show circumstances under which only short-term debt is feasible and under which short-term debt dominates long-term debt when both are feasible. Thus, short-term debt may have the salutary effect of mitigating the moral hazard problem and inducing lower risk-taking. The results are consistent with key features of the common narrative of the period preceding the 2007-2009 financial crisis. |
| Keywords: | Inefficient liquidation; Long-term debt; Optimal financial contracts; Risk-shifting; Rollover risk; Short-term debt |
| JEL: | G21 G32 |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9930&r=cta |
| By: | Sidartha Gordon (Département d'économie); Alessandro Riboni |
| Abstract: | Conflicts are likely less violent if individuals entertain the possibility that the opponent may be right. Why is it so difficult to observe this attitude? In this paper, we consider a game of conflict where two opponents fight in order to impose their preferred policy. Before entering the conflict, one opponent (the agent) trusts the information received by his principal. The principal wants to a↵ect the agent’s e↵ort, but he also cares that the agent selects the correct policy and that he has the right incentives to acquire information.We find conditions under which the principal induces hawkish attitudes in the agent. As a result, the agent has no doubts about the optimality of his preferred policy, conflicts are violent and bad decisions are sometimes made. Under some other conditions, the agent adopts dovish attitudes of systematic doubt and conflicts are less violent. |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:spo:wpecon:info:hdl:2441/1pol0t9ish8aibtfnljt1dn7he&r=cta |
| By: | Inderst, Roman; Vladimirov, Vladimir |
| Abstract: | In a dynamic model of optimal security design, we show when firms should preserve "equity capacity" through choosing high target leverage or "debt capacity" through choosing low target leverage. Thereby, firms reduce a problem of underinvestment or overinvestment when they must raise future financing under asymmetric information. Which problem arises depends on whether additional financing is raised at competitive terms or whether there is a lock-in with initial investors. Firms initial (or target) capital structure matters as it affects the "outside option" of both insiders and outside investors. Our theory also entails implications for start-up and venture capital financing. |
| Keywords: | Asymmetric Information; Capital Structure; Dynamic Security Design; Venture Capital Financing |
| JEL: | G32 |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9923&r=cta |
| By: | Bigus, Jochen; Hakenes, Hendrik |
| Abstract: | For many private firms, relationship lending is the only viable form of outside financing. Relationship lending typically relies on intertemporal loan pricing: losses from early years are recovered by information rents in later years, which stem from the lender's private information regarding the firm's creditworthiness. Our model shows that overly transparent financial reporting reduces the relationship lender's information rent such that the lender has insufficient incentive to offer early stage financing as a result. During financial distress, private firms find it easier to obtain liquidity support from relationship lenders when financial reporting is sufficiently opaque. Conservative opacity enables relationship lending more effectively than aggressive reporting. This paper seeks to explain why private firm financial reporting is (conservatively) opaque and raises concerns regarding recent regulatory efforts that require private firms to engage in more transparent financial reporting because such efforts may result in undesirable side effects. |
| Keywords: | Accounting conservatism; Financial reporting opacity; Private firms; Relationship lending; Small and medium enterprises |
| JEL: | G21 G32 M41 |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9934&r=cta |
| By: | Fan, Ying; Kühn, Kai-Uwe; Lafontaine, Francine |
| Abstract: | Financial constraints are an important impediment to the growth of small businesses. We study theoretically and empirically how the financial constraints of agents affect their decisions to exert effort, and, hence the organizational decisions and growth of principals, in the context of franchising. We find that a 30 percent decrease in average collateralizable housing wealth in a region delays chains' entry into franchising by 0.28 years on average, 9 percent of the average waiting time, and slows their growth by around 10 percent, leading to a 10 percent reduction in franchised chain employment. |
| Keywords: | collateralizable housing wealth; Contracting; empirical; entry; financial constraints; growth; incentives; principal-agent |
| JEL: | D22 D82 L14 L22 L8 |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9728&r=cta |
| By: | Butler, Jeff; Carbone, Enrica; Conzo, Pierluigi; Spagnolo, Giancarlo |
| Abstract: | There is widespread concern that favoring suppliers with good past performance, a standard practice in private procurement, may hinder entry by new firms in public procurement markets. In this paper we report results from a laboratory experiment exploring the relationship between reputation and entry in procurement. We implement a repeated procurement game with reputational incentives for quality and the possibility of entry. We allow also the entrant to start off with a positive reputational score. Our results suggest that while some past-performance based reputational mechanisms do reduce the frequency of entry, appropriately designed mechanisms can significantly increase it. Moreover, the reputational mechanism we investigate typically increases quality but not prices, suggesting that well designed mechanisms may generate very large gains for buyers and taxpayers. |
| Keywords: | bid preferences; entry; feedback mechanisms; outsourcing; past performance; procurement; quality assurance; reputation; vendor rating |
| JEL: | H57 L14 L15 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9651&r=cta |
| By: | Hoffmann, Florian; Inderst, Roman; Opp, Marcus |
| Abstract: | Our paper examines the effect of recent regulatory proposals mandating the deferral of bonus payments and claw-back clauses for compensation contracts in the financial sector. We study a multi-task setting in which a bank employee, the agent, privately chooses (deal or customer) acquisition effort and diligence, which stochastically reduces the occurrence of negative events over time (such as loan defaults or customer cancellations). The key ingredient of the compensation contract is the endogenous timing of a long-term bonus that trades off the cost and benefit of delay resulting from agent impatience and the informational gain, respectively. Our main finding is that government interference with this privately optimal choice may |
| Keywords: | Compensation design; Financial regulation; Principal-agent models |
| JEL: | D86 G21 G28 |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9877&r=cta |
| By: | Cannon, Edmund (University of Bristol); Cipriani, Giam Pietro (University of Verona); Bazar-Rosen, Katia (University of Bristol) |
| Abstract: | We document a large and persistent anomaly in the UK car insurance market over the period 2012-13: insurance companies charged a higher premium for third-party (liability) insurance than comprehensive insurance (which includes third-party). Furthermore, some companies charged higher prices for comprehensive policies with larger deductibles. This evidence suggests both that consumers are too confused or too poorly informed to arbitrage and that sellers of car insurance do not implement the incentive-compatibility constraints at the heart of the adverse-selection model of insurance. This particular insurance market is much less sophisticated than that characterised by modern microeconomic theory. |
| Keywords: | car insurance, adverse selection, bounded rationality |
| JEL: | D82 G22 |
| Date: | 2014–05 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp8172&r=cta |
| By: | Galasso, Alberto; Mitchell, Matthew; Virag, Gabor |
| Abstract: | Patents are a useful but imperfect reward for innovation. In sectors like pharmaceuticals, where monopoly distortions seem particularly severe, there is growing international political pressure to identify alternatives to patents that could lower prices. Innovation prizes and other non-patent rewards are becoming more prevalent in government's innovation policy, and are also widely implemented by private philanthropists. In this paper we describe situations in which a patent buyout is effective, using information from market outcomes as a guide to the payment amount. We allow for the fact that sales may be manipulable by the innovator in search of the buyout payment, and show that in a wide variety of cases the optimal policy still involves some form of patent buyout. The buyout uses two key pieces of information: market outcomes observed during the patent's life, and the competitive outcome after the patent is bought out. We show that such dynamic market information can be effective at determining both marginal and total willingness to pay of consumers in many important cases, and therefore can generate the right innovation incentives. |
| Keywords: | buyout; innovation; mechanism design; patents |
| JEL: | D82 L51 O31 |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9847&r=cta |
| By: | Minchuk, Yizhaq; Sela, Aner |
| Abstract: | We study all-pay auctions with multiple prizes. The players have the same value for all the certain prizes except for one uncertain prize for which each player has a private value. We characterize the equilibrium strategy and show that if the number of prizes is smaller than the number of players, independent of the ranking of the uncertain prize, a player's probability to win as well as his expected utility increases in his value for this prize. We demonstrate that a stochastic dominance relation between two distribution functions of the players' private values may increase but also even decrease the players' ex-ante expected utility as well the players' expected total effort. Also, increasing the number of prizes may decrease the players' ex-ante expected utility. Thus, we may conclude that a larger number of prizes does not necessarily benefit the players in a contest. |
| Keywords: | All-pay auctions; contests; uncertain prizes |
| JEL: | D44 D82 J31 J41 |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9908&r=cta |
| By: | Tressel, Thierry; Verdier, Thierry |
| Abstract: | We consider a moral hazard economy with the potential for collusion between bankers and borrowers to study how incentives for risk taking are affected by the quality of supervision. We show that low interest rates or a low return on investment may generate excessive risk taking. Because of a pecuniary externality, the market equilibrium is not optimal and there is a need for prudential regulation. We show that the optimal capital ratio depends on the state of the macro-financial cycle, and that,in presence of production externalities, the capital ratio should be complemented by a constraint on asset allocation. We study the political economy of supervision. We show that the political process tends to exacerbate excessive risk taking and credit cycles by weakening the quality of banking supervision when instead it should be strengthened. |
| Keywords: | banking regulation; political economy; regulatory forbearance |
| JEL: | D8 E44 G2 |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9871&r=cta |
| By: | Kim, Kyungmin; Kircher, Philipp |
| Abstract: | We consider a frictional two-sided matching market in which one side uses public cheap-talk announcements so as to attract the other side. We show that if the first-price auction is adopted as the trading protocol, then cheap talk can be perfectly informative, and the resulting market outcome is efficient, constrained only by search frictions. We also show that the performance of an alternative trading protocol in the cheap-talk environment depends on the level of price dispersion generated by the protocol: If a trading protocol compresses (spreads) the distribution of prices relative to the first-price auction, then an efficient fully revealing equilibrium always (never) exists. Our results identify the settings in which cheap talk can serve as an efficient competitive instrument, in the sense that the central insights from the literature on competing auctions and competitive search continue to hold unaltered even without ex ante price commitment. |
| Keywords: | cheap talk; commitment; competitive search; directed search |
| JEL: | C72 D82 D83 |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9785&r=cta |
| By: | Stoll, Sebastian; Zöttl, Gregor |
| Abstract: | We study non-binding procurement auctions where both price and non-price characteristics of bidders matter for being awarded a contract. The outcome of such auctions critically depends on how information is distributed among bidders during the bidding process. As we show theoretically, whether it is in the buyer's interest to conceal or to disclose non-price information most importantly depends on how important the quality aspects of the good to be procured are to the buyer: The more important the quality aspects are to the buyer, the more interesting concealment becomes. We then empirically study the impact of a change in the information structure using data from a large European online procurement platform for different categories of goods. In a counterfactual analysis we analyze the reduction of non-price information available to the bidders. In the data we find that the choice of information structure indeed matters. Confirming the hypothesis obtained in our theoretical framework, we find that in auction categories where bidders' non-price characteristics are of little importance for the decisions of the buyers, concealment of non-price information decreases buyers' welfare by up to 6% due to reduced competitive pressure leading to higher bids. In contrast, for categories where bidders' non-price characteristics strongly influence buyers' decisions concealment of non-price information increases buyers' welfare by up to 15%. |
| Keywords: | Procurement; Non-Binding Auctions; Supply Chain Management |
| Date: | 2014–03–27 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:459&r=cta |
| By: | Keser, Claudia; Markstädter, Andreas |
| Abstract: | We investigate the formation of market prices in a new experimental setting involving multi-period call-auction asset markets with state-dependent fundamentals. We are particularly interested in two informational aspects: (1) the role of traders who are informed about the true state and/or (2) the impact of the provision of Bayesian updates of the assets´ state-dependent fundamental values (BFVs) to all traders. We find that bubbles are a rare phenomenon in all of our treatments. Markets with asymmetrically informed traders exhibit smaller price deviations from fundamentals than markets without informed traders. The provision of BFVs has little to no effect. Behavior of informed and uninformed traders differs in early periods but converges over time. On average, uninformed traders offer lower (higher) limit prices and hold less (more) assets than informed traders in good-state (bad-state) markets. Informed traders earn superior profits. -- |
| Keywords: | experimental economics,asset markets,informational asymmetries |
| JEL: | C92 D53 D82 G14 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cegedp:207&r=cta |
| By: | Esteves, Rui; Tuncer, Ali Coskun |
| Abstract: | Debt mutualisation through Eurobonds has been proposed as a solution to the Euro crisis. Although this proposal found some support, it also attracted strong criticisms as it risks raising the spreads for strong countries, diluting legacy debt and promoting moral hazard by weak countries. Because Eurobonds are a new addition to the policy toolkit, there are many untested hypotheses in the literature about the counterfactual behaviour of markets and sovereigns. This paper offers some tests of the issues by drawing from the closest historical parallel—five guaranteed bonds issued in Europe between 1833 and 1913. The empirical evidence suggests that contemporary concerns about fiscal transfers and debt dilution may be overblown, whilst creditors' moral hazard may be as much of a problem as debtors'. |
| Keywords: | Debt dilution; Debt mutualisation; Eurobonds; Moral hazard; Pre-1913 |
| JEL: | F34 H63 H77 N24 N44 |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9860&r=cta |
| By: | Jullien, Bruno; Sand-Zantman, Wilfried |
| Abstract: | We consider a network that intermediates traffic between free content providers and consumers. While consumers do not know the traffic cost when deciding on consumption, a content provider knows his cost but may not control the consumption. We study how pricing consumers' and content providers' sides allows both profit extraction from the network and efficient information transmission. In the case of uniform tariff, we argue that a positive price-cap on the charge to content is optimal (with no constrain on the consumer side). Proposing menus helps signaling useful information to consumers and therefore adjusting consumption to traffic cost. In the case of menus, we show that optimal mechanisms consist in letting the content producers choose between different categories associated with different prices for content and consumers. Our results are robust to competition between ISPs and to competition between contents. We also show that when (competitive) content providers choose at small cost between a pay and a free business model, a price-cap at cost on the price for content improves efficiency. |
| Keywords: | information; intranet; net neutrality; traffic management |
| JEL: | D4 L1 L86 L96 |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9896&r=cta |
| By: | Cooley, Thomas F; Marimon, Ramon; Quadrini, Vincenzo |
| Abstract: | Over the last three decades there has been a dramatic increase in the size of the financial sector and in the compensation of financial executives. This increase has been associated with greater risk-taking and the use of more complex financial instruments. Parallel to this trend, the organizational structure of the financial sector has changed with the traditional partnership replaced by public companies. The organizational change has increased the competition for managerial talent, which may have weakened the commitment between investors and managers. We show how increased competition and the weaker commitment can raise the managerial incentives to undertake risky investment. In the general equilibrium, this change results in higher risk-taking, a larger and more productive financial sector with greater income inequality (within and across sectors), and a lower market valuation of financial institutions. |
| Keywords: | financial corporate governance; Financial risk; income inequality; limited commitment; managerial incentives; parnerships |
| JEL: | E2 G1 G2 G3 |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9725&r=cta |