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on Contract Theory and Applications |
| By: | Gregory S. Crawford; Nicola Pavanini; Fabiano Schivardi |
| Abstract: | We measure the consequences of asymmetric information and imperfect competition in the Italian lending market. We show that banks' optimal price response to an increase in adverse selection varies with competition. Exploiting matched data on loans and defaults, we estimate models of demand for credit, loan use, pricing, and firm default. We find evidence of adverse selection and evaluate its importance. While indeed prices rise in competitive markets and decline in concentrated ones, the former effect dominates, suggesting that while market power can mitigate the adverse effects of asymmetric information, mainstream concerns about its effects survive with imperfect competition. |
| Keywords: | Asymmetric information, imperfect competition, lending markets, Italian banking, adverse selection |
| JEL: | D82 G21 L13 |
| Date: | 2015–04 |
| URL: | http://d.repec.org/n?u=RePEc:zur:econwp:192&r=cta |
| By: | Martin Pollrich (Humboldt-Universitaet zu Berlin) |
| Abstract: | For optimal audit contracts the principle of maximum deterrence applies: penalties imposed by the contract are either zero or at their maximal level. Additionally, an imperfect audit technology which reveals the agent’s type only with an error makes the principal worse off. In this paper I show that both statements are no longer true when the principal cannot commit to an audit strategy. Both intermediate penalties and imperfect audits facilitate the creation of incentives for the principal to carry out an audit. Creation Date: 2015-03-18 |
| Keywords: | Auditing, limited commitment, contract theory |
| JEL: | D82 D86 C72 |
| URL: | http://d.repec.org/n?u=RePEc:bdp:wpaper:2015004&r=cta |
| By: | Kaniska Dam; Prabal Roy Chowdhuri (Division of Economics, CIDE) |
| Abstract: | We develop a model of competition among socially motivated microfinance institutions (MFIs), where the MFIs offer repayment-based incentive contracts to credit agents. The agents gather information regarding a borrower, and may, or may not collude with the borrower, taking bribes in return for not acting upon their information in case of collusion. We show that competition may either increase, or decrease incentives, with incentives becoming less high powered if the MFIs are not too motivated. Further, whenever either the moral hazard problem is relatively severe and/or the MFIs are not too motivated, competition increases default, thus providing a possible explanation for the recent episodes of crisis in the MFI sector. Interestingly, the effects of competition are linked to mission drift, i.e., whether the MFIs in the concerned countries are more, or less motivated. Further, default problems may worsen in case competition is accompanied by greater access to donor funds. |
| Keywords: | Microfinance; competition; collusion; staff incentive schemes; monitoring. |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:emc:wpaper:dte579&r=cta |
| By: | Carey, Mark S. (Board of Governors of the Federal Reserve System (U.S.)); Sun, Bo (Board of Governors of the Federal Reserve System (U.S.)) |
| Abstract: | We analyze the impact of bad-tail risks on managerial pay functions, especially the decision to pay managers in stock or in options. In contrast to conventional wisdom, we find that options are often a superior vehicle for limiting managerial incentives to take bad-tail risks while providing incentives to exert effort. Arrangements similar to collar options are able to incent the desired project choice in wider range of circumstances than call options or stock. However, information requirements appear high. We briefly explore alternatives with features similar to maluses and clawbacks, which are a bit like weakening the limited liability of managers. |
| Keywords: | Compensation; Bad tail risk |
| JEL: | D86 G20 G34 |
| Date: | 2015–01–26 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1130&r=cta |
| By: | Paolo Casini |
| Abstract: | Microfinance institutions, despite the presence of competition and informational asymmetries, typically offer a limited variety of contracts. Assuming price competition, we propose a simple theoretical explanation for this behavior and study its consequences in terms of strategic interaction and borrower welfare. We model an oligopolistic market in which Microfinance Institutions design their contracts and choose how many of them to offer. We find that when offering a menu is costly, MFIs always offer a single contract. Despite that, there exist equilibria in which MFIs coordinate and offer screening contracts, allowing them to extract a large fraction of the borrower welfare. We discuss the policy implications of our model in terms of price caps, market entry and outreach measurement. |
| Keywords: | Micronance, Competition, Altruism, Contract Menus, Credit Rationing |
| JEL: | G21 L13 L31 O16 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:lic:licosd:34914&r=cta |
| By: | Edmans, Alex; Gabaix, Xavier |
| Abstract: | This article studies traditional and modern theories of executive compensation, bringing them together under a unifying framework. We analyze assignment models of the level of pay, and static and dynamic moral hazard models of incentives, and compare their predictions to empirical findings. We make two broad points. First, traditional optimal contracting theories find it difficult to explain the data, suggesting that compensation results from 'rent extraction' by CEOs. In contrast, more modern theories that arguably better capture the CEO setting do deliver predictions consistent with observed practices, suggesting that these practices need not be inefficient. Second, seemingly innocuous features of the modeling setup, often made for tractability or convenience, can lead to significant differences in the model's implications and conclusions on the efficiency of observed practices. We close by highlighting apparent inefficiencies in executive compensation and additional directions for future research. |
| Keywords: | contract theory; executive compensation; optimal contracting; principal-agent problem; rent extraction |
| JEL: | D84 G34 |
| Date: | 2015–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10566&r=cta |
| By: | Sato, Hideki |
| Abstract: | Following a multi-decade history of lethal fires in the Bangladeshi garment industry, Sato (2012) proposed a contract framework that encourages manufacturers to adopt measures that reduce loss of life. Apart from the humanitarian imperative, the manufacturer has an incentive to sign the contract and adopt its preventative measures because an industrial disaster will cancel its relationship with its global retailer and end the related profits. This theoretical study specifies the optimal contract that incentivizes manufacturers and reduces the occurrence of garment industry fires. |
| Keywords: | Garment factory fires, Safety measures, Retailer, Optimal contract |
| JEL: | D62 D82 L67 |
| Date: | 2015–04–30 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:64023&r=cta |
| By: | Wang, Li; Menkhoff, Lukas; Schröder, Michael; Xu, Xian |
| Abstract: | This paper shows that politicians' pressure to climb the career ladder increases bank risk exposure in their region. Chinese local politicians are set growth targets in their region that are relative to each other. Growth is stimulated by debt-financed programs which are mainly financed via bank loans. The stronger the performance incentive the riskier the respective local bank exposure becomes. This effect holds primarily for local banks which are under a certain degree of control of local politicians and it has increased with the release of recent stimulus packages requiring local co-financing. |
| Keywords: | Bank Lending,Bank Risk Exposure,Local Politicians,Promotion Incentives |
| JEL: | G21 G23 H74 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:zewdip:15026&r=cta |
| By: | Alasdair Brown (University of East Anglia); Fuyu Yang (University of East Anglia) |
| Abstract: | Recent evidence suggests that the fastest algorithmic traders in financial markets profit at the expense of slower traders. One solution gaining traction is a `speed-bump', which introduces a delay between the time in which an order is submitted, and when it is processed. We conduct an impact evaluation of the speed bump's effectiveness on Betfair, a betting exchange, where this design has been in force for more than a decade. We find that increases in the duration of the delay led to improvements in liquidity (measured by bid-ask spreads and depth) and market quality (measured by order frequency and volume). |
| Date: | 2015–04 |
| URL: | http://d.repec.org/n?u=RePEc:uea:aepppr:2012_70&r=cta |
| By: | Doniger, Cynthia L. (Board of Governors of the Federal Reserve System (U.S.)) |
| Abstract: | I study a labor market in which identical workers search on- and off-the-job and heterogeneous firms employ using either posted wages or wage contracts contingent on outside options. Firm level costs for contingent contracts generate a separating equilibrium in which less productive firms post wages. The model with heterogeneous contracts can achieve wage dispersion, labor share, employment transitions, and flow value of unemployment that are simultaneously consistent with empirical observations even when most firms post wages. Using German employee-level administrative data, I estimate roughly 70 percent of firms post wages and employ nearly 50 percent of workers under such contracts. |
| Keywords: | Labor supply and demand; Market structure and pricing; Wages and compensation |
| Date: | 2015–03–26 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2015-23&r=cta |
| By: | Migheli, Matteo (University of Turin) |
| Abstract: | Several selection processes use multistage tourname nts to choose the best candidates. The theoretical models predict that tournaments are efficient in selecting the best candidates, as they stimulate the best to perform relatively better than their opponents. Empirical tests are difficult, as data on the agents involved in these selections are scarce. Exploiting data from a field natural experiment, the World Swimming Championships, I show that two- and three-stage tournaments are effective for stimulating performance, selecting the best contestants and the winners are the players who are the most able to increase their relative performance from one stage to the next. |
| Date: | 2015–04 |
| URL: | http://d.repec.org/n?u=RePEc:uto:dipeco:201519&r=cta |