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on Contract Theory and Applications |
| By: | Gabriel Desgranges (THEMA - Théorie économique, modélisation et applications - CNRS : UMR8184 - Université de Cergy Pontoise); Stéphane Gauthier (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris) |
| Abstract: | We study how asymmetric information affects the set of rationalizable solutions in a linear setup where the outcome is determined by forecasts about this same outcome. The unique rational expectations equilibrium is also the unique rationalizable solution when the sensitivity of the outcome to agents' forecasts is less than one, provided that this sensitivity is common knowledge. Relaxing this common knowledge assumption, multiple rationalizable solutions arise when the proportion of agents who know the sensitivity is large, and the uninformed agents believe it is possible that the sensitivity is greater than one. Instability is equivalent to existence of some kind of sunspot equilibria. |
| Keywords: | Asymmetric information; common knowledge; eductive learning; rational expectations; rationalizability |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:hal:pseose:hal-00780372&r=cta |
| By: | Bhowmik, Anuj |
| Abstract: | We investigate two of the most extensively studied cooperative notions in a pure exchange economy with asymmetric information. One of them is the core and the other is known as coalitional fairness. The set of agents is modelled by a mixed market consisting of some large agents and an ocean of small agents; and the commodity space is an ordered Banach space whose positive cone has an interior point. The information system in our framework is the one introduced by Allen in [1]. Thus, the same agent can have common, private or pooled information when she becomes member of different coalitions. It is shown that the main results in Grodal [20], Schmeidler [26] and Vind [31] can be established when the economy consists of a continuum of small agents. We also focus on the information mechanism based on size of coalitions introduced in [18] and obtain a result similar to the main result in [18]. Finally, we examine the concept of coalitional fairness proposed in [21]. We prove that the core is contained in the set of coalitionally fair allocations under some assumptions. This result provides extensions of Theorem 2 in [21] to an economy with asymmetric information as well as a deterministic economy with infinitely many commodities. Although we consider a general commodity space, all our results were so far unsolved to the case of information sharing rule with finitely many commodities. |
| Keywords: | Asymmetric information economy; coalitional fairness; core; information sharing rule. |
| JEL: | D51 D82 |
| Date: | 2014–06–13 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:56644&r=cta |
| By: | Calomiris, Charles W. (Columbia Business School, NBER and IMF); Carlson, Mark A. (Board of Governors of the Federal Reserve System (U.S.)) |
| Abstract: | Managers' incentives may conflict with those of shareholders or creditors, particularly at leveraged, opaque banks. Bankers may abuse their control rights to give themselves excessive salaries, favored access to credit, or to take excessive risks that benefit themselves at the expense of depositors. Banks must design contracting and governance structures that sufficiently resolve agency problems so that they can attract funding from outside shareholders and depositors. We examine banks from the 1890s, a period when there were no distortions from deposit insurance or government interventions to assist banks. We use national banks' Examination Reports to link differences in managerial ownership to different corporate governance policies, risk, and methods of risk management. Formal corporate governance is lower when manager ownership shares are higher. Managerial rent seeking via salaries and insider lending is greater when managerial ownership is higher, and lower when formal governance controls are employed. Banks with higher managerial ownership target lower default risk. Higher managerial ownership and less-formal governance are associated with a greater reliance on cash rather than capital as a means of limiting risk, which we show is consistent both with higher adverse-selection costs of raising outside equity and with greater moral-hazard with respect to risk shifting. |
| Keywords: | Manager ownership; corporate governance; rent seeking; risk preferences; bank failures; risk shifting; adverse selection |
| Date: | 2014–03–24 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2014-08&r=cta |
| By: | Huh, Yesol (Board of Governors of the Federal Reserve System (U.S.)) |
| Abstract: | In today's markets where high frequency traders (HFTs) act as both liquidity providers and takers, I argue that information asymmetry induced by liquidity-taking HFTs' use of machine-readable information is important. This particular type of information asymmetry arises because some machines may access the information before other machines or because of randomness in relative speed. Applying a novel statistical approach to measure HFT activity through limit order book data and using a natural experiment of index inclusion, I show that liquidity-providing HFTs supply less liquidity to stocks that suffer more from this information asymmetry problem. Moreover, when markets are volatile, this information asymmetry problem becomes more severe, and HFTs supply less liquidity. I discuss implications for market-making activity in times of market stress and for HFT regulations. |
| Keywords: | High frequency trading; liquidity; market microstructure; information asymmetry |
| Date: | 2014–03–19 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2014-33&r=cta |
| By: | Cipriani, Marco (Federal Reserve Bank of New York); Martin, Antoine (Federal Reserve Bank of New York); McCabe, Patrick E. (Board of Governors of the Federal Reserve System (U.S.)); Parigi, Bruno (University of Padova) |
| 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 about a shock to the return of the intermediary's assets. Later, the informed investors learn the realization of the shock and can 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 expected utility of only 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: | Banks; money market funds; runs; preemptive runs; gates; fees |
| Date: | 2014–04–03 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2014-30&r=cta |
| By: | Alexander Elvitar (Centro de Investigación y Docencia Económicas, (CIDE)); Andrei Gomberg (Centro de Investigación Económica (CIE), Instituto Tecnológico Autónomo de México (ITAM)); César Martinelli (Centro de Investigación Económica (CIE), Instituto Tecnológico Autónomo de México (ITAM)); Thomas R. Palfrey (California Institute of Technology) |
| Abstract: | We consider a committee with common interests. Committee members do not know which of two alternatives is the best, but each member may acquire privately a costly signal before casting a vote under either majority or unanimity rule. In the lab, as predicted by Bayesian equilibrium, voters are more likely to acquire information under majority rule, and attempt to counter the bias built in favor of one alternative under unanimity rule. As opposed to Bayesian equilibrium predictions, however, some committee members vote for either alternative when uninformed. Moreover, uninformed voting is correlated with a lower disposition to acquire information. We show that an equilibrium model of subjective prior beliefs may account for this correlation, and provides a good fit for the observed patterns of behavior both in terms of rational ignorance and biases. |
| Keywords: | Condorcet jury theorem, rational ignorance, homemade priors |
| JEL: | D72 D83 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:cie:wpaper:1401&r=cta |
| By: | Stéphane Gauthier (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Guy Laroque (IEP Paris - Sciences Po Paris - Institut d'études politiques de Paris - Institut d'Études Politiques [IEP] - Paris - PRES Sorbonne Paris Cité - Fondation Nationale des Sciences Politiques [FNSP], Department of Economics - University College London) |
| Abstract: | The paper identifies a necessary and sufficient condition for a deterministic local optimum to be locally improved upon by a stochastic deviation. When this condition is satisfied, a method to construct the stochastic allocations that increase the objective is provided. This technique is applied to a number of adverse selection and moral hazard problems. |
| Keywords: | second order conditions; constrained optimization; incentive constraints; random contracts |
| Date: | 2014–05 |
| URL: | http://d.repec.org/n?u=RePEc:hal:pseose:hal-00969344&r=cta |
| By: | Altınok, Ahmet; Sever, Can |
| Abstract: | Peer-group mechanisms have been widely used by micro-credit institutions to minimize default risk. However, there are costs associated with establishing and maintaining liability groups. In the case when output is fully observable, we propose a dynamic individual lending mechanism. Assuming that risky borrowers discount the future costs and benefits relatively higher, our mechanism performs equally well in repayment rates, distinguishes safe and risky borrowers through differentiated interest rates and payment schedules. In case of unobservable types, it is able to eliminate adverse selection problem, and it reaches the first best outcome of the case that types of borrowers are publicly known. It improves wealth of individuals, and hence achieves a net welfare-superior outcome when compared with joint liability. Individual lending further saves from internal costs of group formation, and broadens the fractions of society into which microfinance institutions penetrate. We also identify unique welfare maximizing contract in our mechanism. Finally, we introduce a history dependent success probabilities, and show existence of efficient individual contract in that environment. |
| Keywords: | Microfinance, Graamen bank, joint liability, adverse selection, microlending, group lending, individual lending |
| JEL: | D60 D86 G21 O1 O12 |
| Date: | 2014–05–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:56598&r=cta |
| By: | Bajoori, Elnaz |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:eid:wpaper:37904&r=cta |
| By: | Marc Baudry; Adrien Hervouet |
| Abstract: | This article deals with the impact of legislation in the seed sector on incentives for variety creation. Two categories of rules interact. The first category consists in intellectual property rights and is intended to address a problem of sequential innovation and R&D investments by the private sector. The second category concerns commercial rules that are intended to correct a problem of adverse selection on the seed market. We propose a dynamic model of market equilibrium with vertical product differentiation that enables us to take into account the economic consequences of imposing either Plant Breeders’ Rights (PBRs) or patents as IPRs. We simultaneously examine two kinds of commercial legislation: compulsory registration in a catalogue and minimum standards for commercialisation. Analytical results are completed by numerical simulations. The main result is that the combination between minimum standards and PBRs provides higher incentives for sequential innovation and may be preferred by a public regulator to maximise the expected and discounted total surplus when sunk investment costs are low or when they are medium and the probability of R&D success is sufficiently high. This solution differs from the combination of IPRs and commercialisation rules used in both the US and Europe. Otherwise, PBRs have to be replaced by patents, which yields a configuration close to that observed in the US. The catalogue commercialisation rule is seldom preferred to minimum standards, so that the combination of IPRs and commercialisation rules that prevails in Europe is not supported by our model. |
| Keywords: | Intellectual Property Rights, Plant Breeders’ Rights, Catalogue, Product differentiation, Asymmetric information, Biodiversity. |
| JEL: | D43 D82 K11 L13 Q12 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2014-32&r=cta |
| By: | Anatoli Segura (CEMFI, Centro de Estudios Monetarios y Financieros) |
| Abstract: | At the beginning of the past financial crisis sponsoring banks rescued their structured investment vehicles (SIVs) despite of lack of contractual obligation to do so. I show that this outcome may arise as the equilibrium of a signaling game between banks and their debt investors when a negative shock affects the correlated asset returns of a fraction of banks and their sponsored vehicles. The rescue is interpreted as a good signal and reduces the refinancing costs of the sponsoring bank. If banks’ leverage is high or the negative shock is sizable enough, the equilibrium is a pooling one in which all banks rescue. When the aggregate financial sector is close to insolvency, banks’ expected net worth would increase if rescues were banned. The model can be extended to discuss the circumstances in which all banks collapse after rescuing their vehicles. |
| Keywords: | Reputation risk, rescues, mispricing, implicit support, shadow banking system. |
| JEL: | G2 G3 |
| Date: | 2014–05 |
| URL: | http://d.repec.org/n?u=RePEc:cmf:wpaper:wp2014_1402&r=cta |
| By: | Philippe Gagnepain (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Marc Ivaldi (TSE - Toulouse School of Economics - Toulouse School of Economics); David Martimort (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, 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)) |
| Abstract: | Economic theory claims that contracts renegotiation prevents from reaching the informationally constrained efficient solution that could have been obtained under full commitment. Assessing the cost of renegotiation compared to the full commitment scenario still remains an open issue from an empirical viewpoint. To address this question, we fit a structural principal-agent model with renegotiation on a set of contracts for urban transport services. The model captures two important features of the industry. First, only two types of contracts are used in practice (fixed-price and cost-plus). Second, subsidies are greater when a cost-plus contract was signed earlier on than following a fixed-price contract. We then compare a scenario with renegotiation and a hypothetical situation with full commitment. We conclude that the welfare gains from improving commitment would be significant but would accrue mostly to operators. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:hal:pseose:hal-00710639&r=cta |