|
on Contract Theory and Applications |
| By: | Tirole, Jean (Toulouse 1 Capitole University) |
| Abstract: | Jean Tirole delivered his Prize Lecture on 8 December 2014 at the Aula Magna, Stockholm University. |
| Keywords: | Market Power; |
| JEL: | D40 |
| Date: | 2014–12–08 |
| URL: | http://d.repec.org/n?u=RePEc:ris:nobelp:2014_003&r=cta |
| By: | Francesco Giovannoni; Miltiadis Makris |
| Abstract: | We consider auctions where bidders care about the reputational effects of their bidding and argue that the amount of information that is disclosed at the end of the auction will influence bidding. Our analysis focuses on several bid disclosure rules that capture all of the realistic cases. We show that bidders distort their bidding in a way that conforms to stylized facts about takeovers/licence auctions. Also, we rank the disclosure rules in terms of the expected revenues they generate and find that, under certain conditions, full disclosure will not be optimal. |
| Keywords: | Auctions, signaling, disclosure. |
| JEL: | D44 D82 |
| Date: | 2014–06 |
| URL: | http://d.repec.org/n?u=RePEc:bri:uobdis:14/641&r=cta |
| By: | Aniol Llorente-Saguer (Queen Mary University of London); Ro’i Zultan (Ben-Gurion University) |
| Abstract: | The theoretical literature on collusion in auctions suggests that the first-price mechanism can deter the formation of bidding rings. In equilibrium, collusive negotiations are either successful or are avoided altogether, hence such analysis neglects the effects of failed collusion attempts. In such contingencies, information revealed in the negotiation process is likely to affect the bidding behavior in first-price (but not second-price) auctions. We test experimentally a setup in which collusion is possible, but negotiations often break down and information is revealed in an asymmetric way. The existing theoretical analysis of our setup predicts that the first-price mechanism deters collusion. In contrast, we find the same level of collusion in first-price and second-price auctions. Furthermore, failed collusion attempts distort the bidding behavior in the ensuing auction, leading to loss of efficiency and eliminating the revenue dominance typically observed in firstprice auctions. |
| Keywords: | Auctions, Collusion, Bribes, Experiment |
| JEL: | C72 C91 D44 |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp734&r=cta |
| By: | Jonathan P. Thomas (The University of Edinburgh); Tim Worrall (The University of Edinburgh) |
| Abstract: | This paper considers a long-term relationship between two agents who both undertake a costly action or investment that together produces a joint benefit. Agents have an opportunity to expropriate some of the joint benefit for their own use. Two cases are considered: (i) where agents are risk neutral and are subject to limited liability constraints and (ii) where agents are risk averse, have quasi-linear preferences in consumption and actions but where limited liability constraints do not bind. The question asked is how to structure the investments and division of the surplus over time so as to avoid expropriation. In the risk-neutral case, there may be an initial phase in which one agent overinvests and the other underinvests. However, both actions and surplus converge monotonically to a stationary state in which there is no overinvestment and surplus is at its maximum subject to the constraints. In the risk-averse case, there is no overinvestment. For this case, we establish that dynamics may or may not be monotonic depending on whether or not it is possible to sustain a first-best allocation. If the first-best allocation is not sustainable, then there is a trade-off between risk sharing and surplus maximization. In general, surplus will not be at its constrained maximum even in the long run. |
| Keywords: | Relational contracts; self-enforcement; limited commitment; risk sharing. |
| JEL: | C61 C73 D86 D91 L14 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:edn:esedps:253&r=cta |
| By: | Hoang, Daniel; Ruckes, Martin |
| Abstract: | This paper studies the effects of hedge disclosure requirements on corporate risk management and product market competition. The analysis is based on a simple model of market entry and shows that incumbent firms engage in risk management when these activities remain unobserved by outsiders. The resulting equilibrium is desirable from a social standpoint. Financial markets are well informed and entry is efficient. However, potential attempts for more transparency by additional disclosure requirements introduce a commitment device that provides firms with incentives to distort risk management activities thereby influencing entrant beliefs. In equililibrium, firms engage in significant risk-taking. This behavior limits entry and adversely affects the nature of competition in industries. Our findings thus suggest that more disclosure on risk management may change risk management in socially undesirable ways. |
| Keywords: | Risk Management,Hedge Disclosures,Market Entry,Signal Jamming |
| JEL: | D82 G3 L1 M4 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:kitwps:65&r=cta |
| By: | Nocke, Volker; Rey, Patrick |
| Abstract: | We develop a model of interlocking bilateral relationships between upstream firms (manufacturers) that produce differentiated goods and downstream firms (retailers) that compete imperfectly for consumers. Contract offers and acceptance decisions are private information to the contracting parties. We show that both exclusive dealing and vertical integration between a manufacturer and a retailer lead to vertical foreclosure, to the detriment of consumers and society. Finally, we show that firms have indeed an incentive to sign such contracts or to integrate vertically. |
| Keywords: | bilateral contracting; exclusive dealing; foreclosure; vertical merger; vertical relations |
| JEL: | D43 L13 L42 |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10176&r=cta |
| By: | Atkeson, Andrew; Hellwig, Christian; Ordoñez, Guillermo |
| Abstract: | In all markets, firms go through a process of creative destruction: entry, random growth and exit. In many of these markets there are also regulations that restrict entry, possibly distorting this process. We study the public interest rationale for entry taxes in a general equilibrium model with free entry and exit of firms in which firm dynamics are driven by reputation concerns. In our model firms can produce high-quality output by making a costly but efficient initial unobservable investment. If buyers never learn about this investment, an extreme `"lemons problem" develops, no firm invests, and the market shuts down. Learning introduces reputation incentives such that a fraction of entrants do invest. We show that, if the market operates with spot prices, entry taxes always enhance the role of reputation to induce investment, improving welfare despite the impact of these taxes on equilibrium prices and total production. |
| Keywords: | entry regulation; firm dynamics; quality investments; reputation concerns |
| JEL: | D83 L51 |
| Date: | 2014–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10080&r=cta |
| By: | Boeri, Tito; Garibaldi, Pietro; Moen, Espen R |
| Abstract: | All OECD countries have either legally mandated severance pay or compensations imposed by industry-level bargaining in case of employer initiated job separations. According to the extensive literature on Employment Protection Legislation (EPL), such transfers are either ineffective or less efficient than unemployment benefits in providing insurance against labor market risk. In this paper we show that mandatory severance is optimal in presence of wage deferrals motivated by deterrence of opportunistic behavior of workers. Our results hold under risk neutrality and in general equilibrium. We also establish a link between optimal severance and efficiency of the legal system and we characterize the effects of shifting the burden of proof from the employer to the worker. Our model accounts for two neglected features of EPL. The first is the discretion of judges in interpreting the law, which relates not only to the decision as to whether the dismissal is deemed fair or unfair, but also to the nature, economic vs. disciplinary, of the layoff. The second feature is that compensation for dismissal is generally increasing with tenure. The model also rationalizes why severance is generally higher in countries with less efficient judicial systems and why small firms are typically exempted from the strictest EPL provisions. |
| Keywords: | graded security; legal systems; severance; unfair dismissal |
| JEL: | J33 J63 J65 |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10182&r=cta |
| By: | Olivier Bonroy (Economie Appliquée de Grenoble, INRA); Christos Constantatos (Department of Economics, University of Macedonia) |
| Abstract: | Are labels good or bad for consumers and firms? The answer may seem straightforward since labels improve information, yet economic theory reveals situations where their introduction reduces the welfare of at least some market participants. This essay reviews the theoretical literature on labels in order to identify and explain the main reasons that may cause labeling to produce undesirable side-effects. In contrast to earlier reviews that either concentrate on narrow topics or treat the subject in a more or less informal way, we bring together the main results from all the relevant topics by presenting and discussing the assumptions and model-building techniques that underpin them. The advantage of this approach is that it identifies the origin of the differences between results, thus allowing the synthesis of results that sometimes appear even to be contradictory. We focus on “quality labels†and examine the impact of labeling on market structure, the side-effects of costly certification, issues related to the label's trustworthiness, the rationale for mandatory vs. voluntary labeling, the level at which the label's standard is set according to the agency that selects it, the political economy of labels, that is, pro- or anti-label lobbying, lobbying to affect the label's standard, and lobbying in favor or against the label's mandatory imposition. These topics cover a wide range of applications, including Genetically Modified Organism (GMOs), organic produce, geographic indicators, controlled origin, eco-labels, etc. We conclude by identifying topics that require further research. |
| Keywords: | asymmetric information, certification, credence good, labeling, market power, political economy, regulation, vertical product differentiation, welfare, label, réglementation, économie politique, analyse des marchésétiquetagelabel de qualitédifférenciation verticalethéorie économique |
| JEL: | L1 L5 Q1 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:inr:wpaper:277036&r=cta |
| By: | Boone, Jan |
| Abstract: | This paper introduces a tractable model of health insurance with both moral hazard and adverse selection. We show that government sponsored universal basic insurance should cover treatments with the biggest adverse selection problems. Treatments not covered by basic insurance can be covered on the private supplementary insurance market. Surprisingly, the cost effectiveness of a treatment does not affect its priority to be covered by basic insurance. |
| Keywords: | adverse selection; cost effectiveness; moral hazard; public vs private insurance; universal basic health insurance; voluntary supplementary insurance |
| JEL: | D82 H51 I13 |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10199&r=cta |
| By: | Bulow, Jeremy I.; Klemperer, Paul |
| Abstract: | We propose a new form of hybrid capital for banks, Equity Recourse Notes (ERNs), which ameliorate booms and busts by creating counter-cyclical incentives for banks to raise capital, and so encourage bank lending in bad times. They avoid the flaws of existing contingent convertible bonds (cocos)--in particular, they convert more credibly--so ERNs also help solve the too-big-to-fail problem: rather than forcing banks to increase equity, we should require the same or larger capital increase but permit it to be in the form of either equity or ERNs--this also gives some choice to those who claim (rightly or wrongly) that equity is more costly than debt. ERNs can be introduced within the current regulatory system, but also provide a way to reduce the existing system’s heavy reliance on measures of regulatory-capital. |
| Keywords: | bail-in; bank; bank capital; capital requirements; coco; contingent capital; contingent convertible bond; SIFI |
| JEL: | G10 G21 G28 G32 |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10213&r=cta |
| By: | Hart, Oliver; Zingales, Luigi |
| Abstract: | What is so special about banks that their demise often triggers government intervention? In this paper we show that, even ignoring interconnectedness issues, the failure of a bank causes a larger welfare loss than the failure of other institutions. The reason is that agents in need of liquidity tend to concentrate their holdings in banks. Thus, a shock to banks disproportionately affects the agents who need liquidity the most, reducing aggregate demand and the level of economic activity. The optimal fiscal response to such a shock is to help people, not banks, and the size of this response should be larger if a bank, rather than a similarly-sized nonfinancial firm, fails. |
| Keywords: | bailout; banking; Liquidity |
| JEL: | E41 E51 G21 |
| Date: | 2014–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10017&r=cta |
| By: | Binswanger, J. (Tilburg University, Center For Economic Research); Oechslin, M. (Tilburg University, Center For Economic Research) |
| Abstract: | Abstract: When it comes to economic reforms in developing countries, many economists agree on broad objectives (such as fostering outward orientation). Broad objectives, however, can be pursued in many di¤erent ways, and policy experimentation is often indispensable for learning which alternative works locally. We propose a simple model to study this societal learning process. The model explores the role of disagreeing beliefs about “what works”. It suggests that this type of disagreement can stall the societal learning process and cause economic stagnation. Interestingly, this can happen even if everybody knows that Pareto-improving reforms do exist. Our analysis is motivated by the empirical observation of a negative relationship between disagreement and economic growth among poorer countries. |
| Keywords: | Disagreement; experimentation; societal learning; development policy; gridlock |
| JEL: | D72 D78 D83 O11 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:tiu:tiucen:bb4785e9-74c3-46ff-bdab-d3a3a5687396&r=cta |
| By: | Corrado Di Maria (School of Economics, University of East Anglia); Ian Lange (Division of Economics and Business, Colorado School of Mines); Emiliya Lazarova (School of Economics, University of East Anglia) |
| Abstract: | This paper analyzes theoretically and empirically how upstream markets are affected by deregulation downstream. Deregulation tends to increase the level of uncertainty in the upstream market. Our theoretical analysis predicts that deregulated firms respond to this increase in uncertainty by writing more rigid contracts with their suppliers. Using the restructuring of the electricity market in the U.S. as our case study, we find support for our theoretical predictions. Furthermore, we investigate the impact this change in procurement contracts has on efficiency. Focusing on coal mines, we find that those selling coal to plants in restructured markets are significantly more productive than their counterparts working with regulated plants. On the other hand, we also find that transaction costs may have increased as a consequence of deregulation. |
| Keywords: | Energy Policy, Electricity Market Restructuring, Deregulation, Procurement Contracts, Risk, Efficiency |
| JEL: | L14 L15 Q31 Q48 |
| Date: | 2014–11 |
| URL: | http://d.repec.org/n?u=RePEc:mns:wpaper:wp201412&r=cta |
| By: | Florian Gauer (Center for Mathematical Economics, Bielefeld University) |
| JEL: | D85 J64 Z13 |
| Date: | 2014–11 |
| URL: | http://d.repec.org/n?u=RePEc:bie:wpaper:529&r=cta |
| By: | Paciello, Luigi (Einaudi Institute for Economics and Finance); Pozzi, Andrea (Einaudi Institute for Economics and Finance); Trachter, Nicholas (Federal Reserve Bank of Richmond) |
| Abstract: | We study a tractable model of firm price setting with customer markets and empirically evaluate its predictions. Our framework captures the dynamics of customers in response to a change in the price, describes the behavior of optimal prices in the presence of customer acquisition and retention concerns, and delivers a general equilibrium model of price and customer dynamics. We exploit novel micro data on purchases from a panel of households from a large U.S. retailer to quantify the model and compare it to the counterfactual benchmark of the standard monopolistic competition setting. We show that a model with customer markets has markedly different implications in terms of the equilibrium price distribution, which better fit the available empirical evidence on retail prices. Moreover, the dynamic of the response of demand to shocks that affects price dispersion is also distinctive. Our results suggest that inertia in customer reallocation across firms increases the persistence in the response of demand to these shocks. |
| JEL: | E12 E30 L16 |
| Date: | 2014–12–04 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedrwp:14-17&r=cta |
| By: | Jonathan Levin (Stanford University); Andrzej (Andy) Skrzypacz (Stanford University) |
| Abstract: | The combinatorial clock auction is becoming increasingly popular for large-scale spectrum awards and other uses, replacing more traditional ascending or clock auctions. We describe some surprising properties of the auction, including a wide range of ex post equilibria with demand expansion, demand reduction and predation. These outcomes arise because of the way the auction separates allocation and pricing, so that bidders are asked to make decisions that cannot possibly affect their own auction outcome. Our results obtain in a standard homogenous good setting where bidders have well-behaved linear demand curves, and suggest some practical difficulties with dynamic implementations of the Vickrey auction. |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:sip:dpaper:14-002&r=cta |
| By: | Erik Eyster (London School of Economics (LSE)); Kristof Madarasz (London School of Economics (LSE)); Pascal Michaillat (Economics Department London School of Economics (LSE); Centre for Macroeconomics (CFM)) |
| Abstract: | This paper proposes a model that explains the nonneutrality of money from two well-documented psychological assumptions. The model incorporates into the general-equilibrium monopolistic-competition framework of Blanchard and Kiyotaki [1987] the psychological assumptions that (1) consumers dislike paying a price that exceeds some “fair” markup on firms’ marginal costs, and (2) consumers do not know firms’ marginal costs and fail to infer them from prices. The first assumption in isolation renders the economy more competitive without changing any of its qualitative properties; in particular, money remains neutral. The two assumptions together cause money to be nonneutral: greater money supply induces lower monopolistic markups, higher hours worked, and higher output. Whereas an increase in money supply is expansionary, it decreases the fairness of transactions perceived by consumers to such an extent that it reduces overall welfare. The cost of inflation is a psychological one that derives from a mistaken belief by consumers that transactions have become less fair. In fact, it is this misperception that makes an increase in money supply expansionary: consumers misattribute the higher prices arising from higher money supply to higher markups; the misperception of higher markups angers them and makes their demand for goods more elastic; in response, monopolists reduce their markups, thus stimulating economic activity. Through a similar mechanism, an increase in technology induces higher output but higher monopolistic markups and lower hours worked. |
| Date: | 2014–11 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:1430&r=cta |