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on Contract Theory and Applications |
| By: | Kristoffer Nimark (CREI) |
| Abstract: | Public signals are well-known to be particularly influential when privately informed agents interact strategically (e.g. Morris and Shin AER 2002). However, that a signal is ``public" in the common knowledge sense is a much stronger assumption than what is implied by the everyday meaning of the word. In this paper we will argue that it is useful to make a distinction between information that is public in the strong common knowledge sense of the word and information that is merely publicly available. Agents with partially heterogeneous interests have a choice between different information providers, where an information provider is defined by a news selection function. The news selection function of a particular information provider determines which events the provider will report conditional on the entire set of realized events which is a larger set than what is feasible to report on. Information providers thus perform an editorial service for their customers by selecting which events to report. An individual agent will choose to get information from the provider that he expects to report the most interesting events. The optimal choice will depend on the preferences of the agent, the news selection functions available and the distribution of events. The degree of "publicness" of an event is endogenous and the paper thus provides a theory of what type of information becomes common knowledge among populations with heterogeneous interests. The theory can be used to characterize the implications of the editorial function of information providers for agents' posterior beliefs and equilibrium actions. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:487&r=cta |
| By: | Nicolas S. Lambert; Michael Ostrovsky; Mikhail Panov |
| Abstract: | We study trading behavior and the properties of prices in informationally complex markets. Our model is based on the single-period version of the linear-normal framework of Kyle (1985). We allow for essentially arbitrary correlations among the random variables involved in the model: the value of the traded asset, the signals of strategic traders and competitive market makers, and the demand from liquidity traders. We show that there always exists a unique linear equilibrium, characterize it analytically, and illustrate its properties in a series of examples. We then use this characterization to study the informational efficiency of prices as the number of strategic traders becomes large. If liquidity demand is positively correlated (or uncorrelated) with the asset value, then prices in large markets aggregate all available information. If liquidity demand is negatively correlated with the asset value, then prices in large markets aggregate all information except that contained in liquidity demand. |
| JEL: | D53 D82 D84 G12 G14 |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20516&r=cta |
| By: | Georg, Co-Pierre |
| Abstract: | When banks choose similar investment strategies, the financial system becomes vulnerable to common shocks. Banks decide about their investment strategy ex-ante based on a private belief about the state of the world and a social belief formed from observing the actions of peers. When the social belief is strong and the financial network is fragmented, banks follow their peers and their investment strategies synchronize. This effect is stronger for less informative private signals. For endogenously formed interbank networks, however, less informative signals lead to higher network density and less synchronization. It is shown that the former effect dominates the latter. JEL Classification: G21, C73, D53, D85 |
| Keywords: | endogenous nancial networks, multi-agent simulations, social learning, Systemic risk |
| Date: | 2014–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20141700&r=cta |
| By: | Roberto Chavez (Facultad de Economía y Empresa, Universidad Diego Portales) |
| Abstract: | Much supply chain integration literature tends to be biased towards its positive impact on operational performance. However, inconclusive results demand investigation of the mechanisms through which supply chain integration can lead to superior operational performance. We propose information quality as such mechanism. The purpose of this study is to identify empirically the mediating role of information quality on the relationship between customer integration and operational performance, and the direct relationship between customer integration and operational performance. The study is based on a questionnaire sent to 228 manufacturing companies in the Republic of Ireland, and the relationships between the constructs are analysed through regression analysis. The results indicate that information quality partially mediates the relationship between customer integration and quality, delivery and flexibility. Further, information quality was found to fully mediate the relationship between customer integration and cost. For practitioners, when the objective is to improve quality, delivery and flexibility, manager should be aware that information quality alone might not be very effective. Instead, information quality should be complemented by customer integration efforts. When the objective is to improve cost, managers can enjoy cost advantage via their capability to obtain and exchange information quality. |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:ptl:wpaper:57&r=cta |
| By: | Alan Elizondo (Banco de México); Enrique Seira (Centro de Investigación Económica (CIE), Instituto Tecnológico Autónomo de México (ITAM)) |
| Abstract: | Consumer protection in financial markets in the form of information disclosure is high on governments agendas, espite the fact that the empirical evidence on its effectiveness is scarce. To measure the impact of Truth-in-Lending-Act-type disclosures on default and indebtedness, as well as of debiasing warning messages and social comparison information, we implement a randomized control trial in the credit card market for a large population of indebted cardholders. We find that providing salient interest rate disclosures has no effect, while social comparisons and debiasing messages have only a odest effect. Other types of disclosures discussed in the paper could have larger effects |
| Keywords: | Credit cards, information disclosure, truth in lending, Mexico. |
| JEL: | D12 D14 D83 G02 G21 G28 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:cie:wpaper:1407&r=cta |
| By: | Masaaki Fujii (The University of Tokyo); Akihiko Takahashi (The University of Tokyo) |
| Abstract: | All the financial practitioners are working in incomplete markets full of unhedgeable risk-factors. Making the situation worse, they are only equipped with the imperfect information on the relevant processes. In addition to the market risk, fund and insurance managers have to be prepared for sudden and possibly contagious changes in the investment flows from their clients so that they can avoid the over- as well as under-hedging. In this work, the prices of securities, the occurrences of insured events and (possibly a network of) the investment flows are used to infer their drifts and intensities by a stochastic filtering technique. We utilize the inferred information to provide the optimal hedging strategy based on the mean-variance (or quadratic) risk criterion. A BSDE approach allows a systematic derivation of the optimal strategy, which is shown to be implementable by a set of simple ODEs and the standard Monte Carlo simulation. The presented framework may also be useful for manufactures and energy firms to install an efficient overlay of dynamic hedging by financial derivatives to minimize the costs. |
| Date: | 2014–07 |
| URL: | http://d.repec.org/n?u=RePEc:cfi:fseres:cf348&r=cta |
| By: | Dong, Ming |
| Abstract: | This article explores life insurance consumption in 31 European countries from 2003 to 2012 and aims to investigate the extent to which market transparency can affect life insurance demand. The cross-country evidence for the entire sample period shows that greater market transparency, which resolves asymmetric information, can generate a higher demand for life insurance. However, when considering the financial crisis period (2008-2012) separately, the results suggest a negative impact of enhanced market transparency on life insurance consumption. The mixed findings imply a trade-off between the reduction in adverse selection under greater market transparency and the possible negative effects on life insurance consumption during the crisis period due to more effective market discipline. Furthermore, this article studies the extent to which transparency can influence the reaction of life insurance demand to bad market outcomes: i.e., low solvency ratios or low profitability. The results indicate that the markets with bad outcomes generate higher life insurance demand under greater transparency compared to the markets that also experience bad outcomes but are less transparent. |
| Keywords: | life insurance demand,transparency,market discipline |
| JEL: | G14 G22 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:icirwp:1714&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:journl:hal-00710639&r=cta |
| By: | Raszap Skorbiansky, Sharon; Wu, Steven |
| Abstract: | Many markets include communication forums (e.g. Angie's List for services, Yelp for restaurants) to facilitate trading between buyers and sellers. Some market-makers go beyond creating forums and make investments to improve the quality of communication platforms, such as by recruiting “elite” yelp members or Amazon Vine Program reviewers, in order to introduce more truthful reviews. We conduct an experiment in order to examine who benefits from providing communication forums and under what conditions should a market-maker invest in better communication. When third-party enforcement for quality is unavailable, theory predicts that communication will be especially important to facilitate reputation incentives to substitute for lack of contract enforceability. In our control treatment, buyers and sellers trade using imperfectly enforced contracts with no communication between the parties. Then we introduce two treatments with structured communication where subjects can endogenously choose to send pre-selected messages about their transaction (e.g. “the seller did not deliver desired quality”). We allow for two different types of communication: (a) send any pre-selected message regardless of trading outcomes, or (b) only send truthful messages. Our results show that compared to the control treatment, the addition of unverified communication does not have a significant impact on efficiency or social surplus, perhaps due to seller dishonesty in the communication system. Income distribution becomes more equitable, however, suggesting that unverified communication is an overall beneficial tool for development. We also find that there is much to gain from investments in improving communication over simply providing an opportunity for communication. Verifiable communication yields large increases in efficiency, and social surplus. It also alleviates, albeit mildly, income inequalities between buyers and sellers. |
| Keywords: | contracting, communication, trade, Agricultural and Food Policy, Industrial Organization, International Development, |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea14:170631&r=cta |
| By: | Debasis Mishra |
| Abstract: | We study deterministic voting mechanisms by considering an ordinal notion of Bayesian incentive compatibility (OBIC). If the beliefs of agents are independent and generic, we show that any OBIC mechanism is dominant strategy incentive compatible under an additional mild requirement. Our result works in a large class of preference domains (that include the unrestricted domain, the single peaked domain, a specific class of single crossing domains) and under a weaker notion of OBIC that we call locally OBIC. We also discuss the implications of assuming unanimity on our results. |
| Date: | 2014–11 |
| URL: | http://d.repec.org/n?u=RePEc:dpr:wpaper:0916&r=cta |
| By: | Jos\'e Manuel Corcuera; Giulia Di Nunno; Gergely Farkas; Bernt {\O}ksendal |
| Abstract: | In a unified framework we study equilibrium in the presence of an insider having information on the signal of the firm value, which is naturally connected to the fundamental price of the firm related asset. The fundamental value itself is announced at a future random (stopping) time. We consider the two cases in which this release time of information is known and not known, respectively, to the insider. Allowing for very general dynamics, we study the structure of the insider's optimal strategies in equilibrium and we discuss market efficiency. With respect to market efficiency, we show that in the case the insider knows the release time of information, the market is fully efficient. In the case the insider does not know this random time, we see that there is no full efficiency, but there is nevertheless an equilibrium where the sensitivity of prices is decreasing in time according with the probability that the announcement time is greater than the current time. In other words, the prices become more and more stable as the announcement approaches. |
| Date: | 2014–11 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1411.2835&r=cta |
| By: | Jalava, Nina (Stockholm School of Economics); Joensen, Juanna Schrøter (Stockholm School of Economics); Pellas, Elin (Stockholm School of Economics) |
| Abstract: | How does effort respond to being graded and ranked? This paper examines the effects of non-financial incentives on test performance. We conduct a randomized field experiment on more than a thousand sixth graders in Swedish primary schools. Extrinsic non-financial incentives play an important role in motivating highly skilled students to exert more effort. We find significant differences in test scores between the intrinsically motivated control group and three of four extrinsically motivated treatment groups. The only treatment not increasing test performance is criterion-based grading on an A-F scale, which is the typical grading method. Test performance is significantly higher if employing rank-based grading or giving students a symbolic reward. The motivational strengths of the non- financial incentives differ across the test score distribution, across the skill distribution, with peer familiarity, and with respect to gender. Boys are only motivated by rank-based incentives, while girls are also motivated by receiving a symbolic reward. Rank-based grading and symbolic rewards tend to crowd out intrinsic motivation for students with low skills, while girls also respond less to rank-based incentives if tested with less familiar peers. |
| Keywords: | test-taking, performance incentives, effort, extrinsic and intrinsic motivation, randomized experiment |
| JEL: | I20 I21 D03 C93 |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp8412&r=cta |
| By: | Diego d'Andria (Friedrich Schiller University of Jena, DFG Research Training Group "The Economics of Innovative Change") |
| Abstract: | A principal-agent multitasking model is used to explore the effects of different tax schemes on innovation in a pure knowledge economy. Corporate taxes and labor income taxes can affect both the firm owner's and the employee's incentives to commit to innovative tasks, when the former compensates the latter (a manager, technical or R&D employee) by means of variable pay tied to measures of the company's success. Results point to a complementary role between "patent box" tax incentives and reductions in the tax rate levied on profit sharing schemes. This complementarity holds, albeit with different relative importance for the two tax incentives, also with non-deductible labor costs, with a stochastic innovation value coupled with a risk-averse agent, and with multiple principals competing for talented agents. |
| Keywords: | tax incentives for R&D, patent box, principal-agent models, multitasking models, profit sharing schemes, incentives to innovate |
| JEL: | H2 O31 J33 |
| Date: | 2014–11–11 |
| URL: | http://d.repec.org/n?u=RePEc:jrp:jrpwrp:2014-028&r=cta |
| By: | Makoto Nirei (Hitotsubashi University); Tsutomu Watanabe (The University of Tokyo) |
| Abstract: | Using a simultaneous-move herding model of rational traders who infer other traders' private information on the value of an asset by observing their aggre- gate actions, this study seeks to explain the emergence of fat-tailed distributions of transaction volumes and asset returns in financial markets. Without mak- ing any parametric assumptions on private information, we analytically show that traders' aggregate actions follow a power law distribution. We also provide simulation results to show that our model successfully reproduces the empirical distributions of asset returns. We argue that our model is similar to Keynes's beauty contest in the sense that traders, who are assumed to be homogeneous, have an incentive to mimic the average trader, leading to a situation similar to the indeterminacy of equilibrium. In this situation, a trader's buying action causes a stochastic chain-reaction, resulting in power laws for financial fluctuations. |
| Date: | 2014–06 |
| URL: | http://d.repec.org/n?u=RePEc:cfi:fseres:cf346&r=cta |
| By: | Savage, Jeffrey; Ribaudo, Marc |
| Abstract: | A concern for any program that offers payment for environmental services is that those services be additional. Non-additional services are those that would have been provided without the payment. One source of non-additionality is farmer misrepresentation of their pre-program management. Farm management practices are often difficult to observe, particularly those that do not involve structural changes, such as nutrient management. If practices are difficult to observe, management oversight lax, and enforcement weak, the farmer has an incentive to provide biased information that increases the likelihood that he will receive a more favorable baseline for calculating services created, and a larger payment. This is a moral hazard problem. The presence of non-additional credits in a water quality trading program can result in the degradation of water quality. Point source discharges above permitted levels are replaced by equivalent reductions from unregulated nonpoint sources. If the abatement that point sources purchase from nonpoint sources is non-additional, discharges will be higher than if the abatement was truly additional. Preventing non-additional credits from entering a water quality trading market is one of the goals of program design. In this paper we assess how program eligibility baseline choice affects the incentive to misrepresent baseline nutrient management practices using data from the Chesapeake Bay Watershed. |
| Keywords: | additionality, point-nonpoint water quality trading, baseline, nutrient management, moral hazard, Environmental Economics and Policy, |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea14:170426&r=cta |
| By: | Brown, Martin; Trautmann, Stefan T.; Vlahu, Razvan |
| Abstract: | We study experimental coordination games to examine through which transmission channels, and under which information conditions, a panic-based depositor-run at one bank may trigger a panic-based depositor-run at another bank. We find that withdrawals at one bank trigger withdrawals at another bank by increasing players’ beliefs that other depositors in their own bank will withdraw, making them more likely to withdraw as well. Importantly though, observed withdrawals affect depositors’ beliefs, and are thus contagious, only when depositors know that there are economic linkages between their bank and the observed bank. JEL Classification: D81, G21, G28 |
| Keywords: | bank runs, Contagion, Systemic risk |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20141711&r=cta |