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on Contract Theory and Applications |
| By: | James Albrecht; Xiaoming Cai; Pieter Gautier; Susan Vroman; Pieter A. Gautier |
| Abstract: | This paper considers competitive search equilibrium in a market for a good whose quality differs across sellers. Each seller knows the quality of the good that he or she is offering for sale, but buyers cannot observe quality directly. We thus have a “market for lemons” with competitive search frictions. In contrast to Akerlof (1970), we prove the existence of a unique equilibrium, which is separating. Higher-quality sellers post higher prices, so price signals quality. The arrival rate of buyers is lower in submarkets with higher prices, but this is less costly for higher-quality sellers given their higher continuation values. For some parameter values, higher-quality sellers post the full-information price; for other values these sellers have to post a higher price to keep lower-quality sellers from mimicking them. In an extension, we show that if sellers compete with auctions, the reserve price can also act as a signal. |
| Keywords: | competitive search, signaling |
| JEL: | C78 D82 D83 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11309 |
| By: | Masaki Aoyagi (ISER, Osaka University); Maxime Menuet (Université Côte d'Azur, CNRS, GREDEG, France) |
| Abstract: | This paper studies the optimal disclosure of information about an agent's quality when it is a combination of a component privately observed by the agent and another latent component. Upon soliciting a report from the agent about his private observation, a principal performs a test which reveals the latent component. The principal then discloses information to the market/public which rewards the agent with compensation equal to the agent's expected quality. We study incentive compatible disclosure rules that minimize the mismatch between the agent's true and expected qualities while inducing truth-telling from the agent. The optimal rule entails full disclosure when the agent's quality is a supermodular function of the two components, but entails partial pooling when it is submodular. We express the optimization problem as a linear transformation of the mean dual-belief, which describes the joint distribution of prior and mean posterior beliefs under disclosure, and obtain the optimal disclosure rule as a corner solution to this linear problem. We identify the number of messages required under the optimal rule and relate it to the agent's incentive compatibility conditions. |
| Keywords: | quality, mechanism, revelation, pooling, separating |
| JEL: | C72 D47 D82 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:gre:wpaper:2024-30 |
| By: | Fan Wu |
| Abstract: | I study a principal-agent model in which a principal hires an agent to collect information about an unknown continuous state. The agent acquires a signal whose distribution is centered around the state, controlling the signal's precision at a cost. The principal observes neither the precision nor the signal, but rather, using transfers that can depend on the state, incentivizes the agent to choose high precision and report the signal truthfully. I identify a sufficient and necessary condition on the agent's information structure which ensures that there exists an optimal transfer with a simple cutoff structure: the agent receives a fixed prize when his prediction is close enough to the state and receives nothing otherwise. This condition is mild and applies to all signal distributions commonly used in the literature. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2410.13978 |
| By: | Sanjit Dhami; Mengxing Wei |
| Abstract: | In a principal-agent model under moral hazard we examine the psychological and social motivations of the agent that influence the incentive compatibility condition (ICC) of the agent. Under “firm culture” firms emphasize that high effort is consistent with its culture. Under “industry-wide social norms” external to the firm, the social group emphasizes high effort levels. We only consider the case where the ICC is violated in the classical case. A significant fraction of the agents choose high effort. Firm culture backed by simple disapproval of low effort is more effective relative to our baseline under fixed wages. Strong social norms are as effective as firm culture under variable wages, but more effective under fixed wages. Firm culture dominates weak social norms. Variable wages induce high effort (incentive effects) but also crowd out intrinsic motivation in the form of (i) guilt aversion from not following firm culture and (ii) shame aversion from not following social norms. |
| Keywords: | incentive compatibility, insurance and incentives, firm culture, guilt-aversion, social norms, shame-aversion |
| JEL: | D01 D91 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11371 |