|
on Contract Theory and Applications |
| By: | Elisabetta Iossa; David Martimort |
| Abstract: | In a public procurement setting, we discuss the desirability of completing contracts with state-contingent clauses providing for monetary compensations to the contractor when revenue shocks occur. Realized shocks are private information of the contractor and this creates agency costs of delegated service provision. Verifying the contractor’s messages on the shocks entails contracting costs that make incomplete contracts attractive, despite their higher agency costs. A public official (supervisor) has private information on contracting costs and chooses the degree of contractual incompleteness on behalf of an upper-tier public authority. As the public official may be biased towards the contractor, delegating the contractual choice to that lower-tier may result in incomplete con-tracts being chosen too often. Empirical predictions on the use of incomplete contracts and policy implications on the benefits of standardized contract terms are discussed. |
| Keywords: | Corruption, Incomplete Contracts, Moral Hazard, Principal-Agent-Supervisor Model, Public-Private Partnerships, Risk Allocation |
| JEL: | D23 D82 K42 L33 |
| Date: | 2014–06 |
| URL: | http://d.repec.org/n?u=RePEc:bri:cmpowp:14/325&r=cta |
| By: | Dirk Bergemann (Cowles Foundation, Yale University); Stephen Morris (Dept. of Economics, Princeton University) |
| Abstract: | A game of incomplete information can be decomposed into a basic game and an information structure. The basic game defines the set of actions, the set of payoff states the payoff functions and the common prior over the payoff states. The information structure refers to the signals that the players receive in the game. We characterize the set of outcomes that can arise in Bayes Nash equilibrium if players observe the given information structure but may also observe additional signals. The characterization corresponds to the set of (a version of) incomplete information correlated equilibria which we dub Bayes correlated equilibria. We identify a partial order on many player information structures (individual sufficiency) under which more information shrinks the set of Bayes correlated equilibria. This order captures the role of information in imposing (incentive) constraints on behavior. |
| Keywords: | Correlated equilibrium, Incomplete information, Bayes Nash equilibrium, Bayes correlated equilibrium, Robust predictions, Information structure, Sufficiency, Blackwell ordering |
| JEL: | C72 D82 D83 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:1909rrr&r=cta |
| By: | Carlos A. Arango; Oscar M. Valencia |
| Abstract: | This paper presents a DSGE model with banks that face moral hazard in management. Banks receive demand deposits and fund investment projects. Banks are subject to potential withdrawals by depositors which may force them into early liquidation of their investments. The likelihood of this happening depends on the bank management efforts to keep the bank financially sound and the degree of bank leverage. We study the properties of this model under different monetary and macro-prudential policy arrangements. Our model is able to replicate the pro-cyclicality of leverage, and provides insights on the interplay between bank leverage and bank management incentives as a result of monetary, productivity and financial shocks. We find that a combination of pro-cyclical capital requirements and a standard monetary policy are well suited to contain the effects on output and prices of a downturn, keeping the financial system in check. Yet, in an expansionary phase (i.e. a productivity shock) this policy combination may produce desirable results for some macro-variables but at the expense of a deterioration in other macro-financial indicators. |
| Keywords: | DSGE modeling, Financial frictions, Moral hazard, Macro-prudential policies. |
| JEL: | G11 D86 |
| Date: | 2015–04–10 |
| URL: | http://d.repec.org/n?u=RePEc:col:000094:012695&r=cta |
| By: | Massa, Massimo; Zhang, Lei |
| Abstract: | We study the relation between information and fire sales during a crisis. We argue that the reinforcing effect of funding liquidity on market liquidity is weaker when investors have more information about the assets facing sudden price drops (Brunnermeier and Pedersen, 2009). We focus on the affiliation of international asset managers with banking conglomerates. We document that bank affiliation provides an informational advantage. We show that (informed) bank-affiliated foreign ownership before the crisis predicts higher stock liquidity, lower extreme negative return realizations, lower short-selling demand, lower comovement (R2) with the market and higher price informativeness during the crisis. |
| Keywords: | bank-affiliation; fire sales; global asset managers; international crisis; international liquidity.; transmission |
| JEL: | G10 G15 G21 |
| Date: | 2015–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10536&r=cta |
| By: | Annalisa Fabretti (DEF, University of Rome Tor Vergata); Tommy Gärling (University of Gothenburg); Stefano Herzel (DEF and CEIS, University of Rome Tor Vergata); Martin Holmen (University of Gothenburg) |
| Abstract: | This paper uses agent-based simulation to analyze how financial markets are affected by market participants with convex incentives, e.g. option-like compensation. We document that convex incentives are associated with (i) higher prices, (ii) larger variations of prices, and (iii) larger bid-ask spreads. We conclude that convex incentives may lead to decreased stability of financial markets. Our analysis suggests that the decreased stability is driven by the fact that convex incentives pushes agents towards more extreme decisions. Furthermore, while risk preferences affect agent behavior if they have linear incentives, the effect of risk preferences vanishes with convex incentives. |
| Keywords: | incentives, market instability, agent-based simulations. |
| JEL: | G10 D40 D53 |
| Date: | 2015–04–08 |
| URL: | http://d.repec.org/n?u=RePEc:rtv:ceisrp:337&r=cta |
| By: | Azam, Jean-Paul |
| Abstract: | This paper uses a provocation model to explain why the initial Muslim coalitions against southern Christians broke up in Sudan and Chad. The need to cooperate was made obvious in Sudan when oil flew in a Chinese-built pipeline running through the Christian rebels’ homeland. Jihad was called off and political Islam was discarded when the rebels showed their ability to disrupt the oil flow by blowing up the pipeline. The government of Sudan had switched from African socialism to Political Islam a couple of decades before. It then imposed the Sharia Law even on the Christians as a provocation to trigger a rebellion after years of peace and to launch an ethnic cleansing campaign in the oil-rich areas. In Chad also, the initial Muslim coalition against the Christians broke up for sharing the oil money with the latter, but with a different timing. |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:29179&r=cta |
| By: | Jack Britton; Carol Propper |
| Abstract: | Teacher wages are commonly set in a manner that results in flat wages across heterogeneous labor markets. Consequently teacher wages will be relatively worse in areas where local labor market wages are high. The implication is that teacher output will be lower in high outside wage areas. This paper exploits the centralized wage regulation of teachers in England to examine the effect of wages on school performance. It uses data on over 3000 schools containing around 200,000 teachers who educate around half a million children per year. We find that teachers respond to pay and schools add less value to their pupils where the regulation bites harder. Our calculations suggest that the removal of regulation would have positive social benefits. |
| Keywords: | Teacher wages, Centralised Pay Regulation, School performance, School Value Added |
| JEL: | I2 J3 J4 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:bri:cmpowp:14/318&r=cta |
| By: | Joanna Stryjek (Warsaw School of Economics) |
| Abstract: | Tax incentives for innovation, including in particular the incentives for R&D investments, are universally used policy tools. Their availability and generosity have significantly increased over the past three decades. The observed proliferation of R&D tax incentives raises the question of the effectiveness (as well as other potential unknown advantages) of these policy instruments. The purpose of this paper is to carry out an analysis of the reasons (1) why R&D tax incentives became such a popular policy tool and (2) why there was an increase in generosity of this kind of incentives in recent years. As far as the theoretical base for the analysis is concerned, the paper refers particularly to (1) the inter-jurisdictional competition theories relating to tax competition and (2) the (quasi-) public-good nature of knowledge and innovation. The analysis is carried out with the use of the existing data and research on the subject. The results indicate that these are the changes (processes taking place) in the international environment that have considerably stimulated the proliferation and the increase in generosity of R&D tax incentives. |
| Keywords: | innovation; R&D; tax incentives; tax credit; tax competition |
| JEL: | O31 O38 H21 |
| Date: | 2015–04 |
| URL: | http://d.repec.org/n?u=RePEc:pes:wpaper:2015:no109&r=cta |