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Essays On Optimal Contracts With Overconfidence
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Book Synopsis Essays on Optimal Contracts with Overconfidence by : Justin R. Downs
Download or read book Essays on Optimal Contracts with Overconfidence written by Justin R. Downs and published by . This book was released on 2020 with total page 102 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation studies the effect of overconfidence on markets and organizations with asymmetric information. In the first chapter, I introduce overconfidence into a standard information gathering contracting model. A principal (she) hires an agent (he) to gather information about a project's cost before he implements the project, and the agent overestimates the probability of having a low implementation cost. The agent's overconfidence makes him more willing to sign the contract, but less willing to gather information, and increases in overconfidence may increase or decrease the principal's profit. In the second chapter, I study a labor market where firms hire overconfident workers who have private information about their productivity. I derive the optimal contracts for both a monopsonistic market, where one firm makes take-it-or-leave-it offers to the workers, as well as a competitive market, where many firms compete for the services of workers. Overconfidence causes the optimal contract to be distorted away from the efficient outcome in both markets, but a monopsonistic firm internalizes these distortions while a competitive firm does not. The main result is that monopsonistic markets can be more efficient than competitive markets. In the third chapter, I provide a review of several mathematical definitions of overconfidence used in the contract theory literature and apply them all to a generalized version of the information gathering model from Chapter 1. The effects overconfidence has on the agent's willingness to participate, to gather information, and on the principal's profit are all sensitive to the mathematical definition of overconfidence used in the model.
Book Synopsis Essays on Optimal Contracts and Renegotiation by : Susanne Ohlendorf
Download or read book Essays on Optimal Contracts and Renegotiation written by Susanne Ohlendorf and published by . This book was released on 2009 with total page 111 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Essays on Contracts written by Zenan Wu and published by . This book was released on 2015 with total page 252 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation consists of two essays on contract theory. I investigate contracts under different economics contexts. In the first chapter, I consider a two-period model in which the success of the firm depends on the effort of a first-period manager (the incumbent) and the ability of a second-period manager. At the end of the first period, the board receives a noisy signal of the incumbent manager's ability and decides whether to retain or replace the incumbent manager. I show that the information technology the board has to assess the incumbent manager's ability is an important determinant of the optimal contract and replacement policy. The contract must balance providing incentives for the incumbent manager to exert effort and ensuring that the second-period manager is of high ability. I show that severance pay in the contract serves as a costly commitment device to induce effort. Unlike existing models, I identify conditions on the information structure under which both entrenchment and anti-entrenchment emerge in the optimal contract. In the second chapter, I use a dynamic model of life insurance with one-sided commitment and bequest-driven lapsation, as in Daily, Hendel and Lizzeri (2008) and Fang and Kung (2010), but with policyholders who may underestimate the probability of losing their bequest motive, to analyze how the life settlement market--the secondary market for life insurance--may affect consumer welfare in equilibrium. I show that life settlement may increase consumer welfare in equilibrium when (i) policyholders are sufficiently overconfident; and (ii) the intertemporal elasticity of substitution of consumption (IES) of policyholders is greater than one.
Book Synopsis Essays on Optimal Dynamic Incentive Contracts by : Carsten Sebastian Pfeil
Download or read book Essays on Optimal Dynamic Incentive Contracts written by Carsten Sebastian Pfeil and published by . This book was released on 2011 with total page 150 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Essays in Dynamic Contract Theory by : Rui Zhao
Download or read book Essays in Dynamic Contract Theory written by Rui Zhao and published by . This book was released on 2001 with total page 224 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Essays on Optimal Dynamic Incentiv Contracts by : Carsten Sebastian Pfeil
Download or read book Essays on Optimal Dynamic Incentiv Contracts written by Carsten Sebastian Pfeil and published by . This book was released on 2011 with total page 150 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Essays on Contract Theory by : Alice Peng-Ju Su
Download or read book Essays on Contract Theory written by Alice Peng-Ju Su and published by . This book was released on 2014 with total page 87 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation is primarily on the contractual design to account for various source of information asymmetry in a principal-agent(s) relationship. In the first chapter, I study the optimal provision of team incentives with the feasibility for the agents to coordinate private actions through repeated interaction with imperfect public monitoring. As the agents' imperfect monitoring of private actions is inferred from the stochastically correlated measurements, correlation of measurement noise, besides its risk sharing role in the conventional multiple-agent moral hazard problem, is crucial to the accuracy of each agent's inference on the other's private action. The principal's choice of performance pay to provide incentive via inducing competition or coordination among the agents thus exhibits the tradeoff between risk sharing and mutual inference between the agents. I characterize the optimal form of performance pay with respect to the correlation of measurement noise and find that it is not monotonic as suggested by the literature. In the second chapter, I study the optimal incentive provision in a principal-agent relationship with costly information acquisition by the agent. When it is feasible for the principal to induce or to deter perfect information acquisition, adverse selection or moral hazard arises in response to the principal's decision, as if she is able to design a contract not only to cope with an existing incentive problem, but also to implement the existence of an incentive problem. The optimal contract to implement adverse selection by inducing information acquisition, comparing to the second best menu, exhibits a larger rent difference between an agent in an efficient state and whom in an inefficient state. The optimal contract to implement moral hazard by deterring information acquisition, comparing to the second best debt contract, prescribes a lower debt and an equity share of output residual. With imperfect information acquisition or private knowledge of information acquiring cost, the contract offered to an uninformed agent is qualitatively robust, and that to the informed exhibits countervailing incentives. I relax the assumption of complete contracting and study truthful information revelation in an incomplete contracting environment in the third chapter. Truthful revelation of asymmetric information through shared ownership (partnership) is incorporated into the Property Right Theory of the firms. Shared ownership is optimal as an information transmission device, when it is incentive compatible within the relationship as well as when the relationship breaks, at the expense of the ex-ante incentive to invest in the relationship-specific asset as the hold-up concern is not efficiently mitigated. Higher (lower) level of integration is optimal with a lower marginal value of asset if the information rent effect is stronger (weaker) than the hold-up effect.
Book Synopsis Essays on Optimal Contract Design by : Jin Xu
Download or read book Essays on Optimal Contract Design written by Jin Xu and published by . This book was released on 2013 with total page 136 pages. Available in PDF, EPUB and Kindle. Book excerpt: The optimal compensation contract is a very important issue for firms. Some empirical findings of wage structure in internal labor market are puzzling. For example, why are the compensation of workers more compressed than predicted by the classical theories. Why is the wage structure convex in hierarchical firms? This dissertation explores various important factors which may affect the optimal contract in the internal labor market. The first chapter characterizes the optimal contract when workers in the workplace care not only about theirown wage but alos their co-workers' wage. Specifically, I assume that workers are inequity averse model of Fehr and Schmidt (1999), I derive that the optimal wage structure is more compressed with inequity averse workers than with the standard workers. Inequity aversion among workers can also help explain the internal organization of the firms. For example, inequity aversion among workers may lead firms to employ only high productivity workers, even though the marginal product of a low productivity worker is higher than the worker's marginal cost. Chapter 2 examines two possibile realistic explanations for the convex wage structure in the hierarchical firms. Based on the multi-round tournament model of Rosen (1986), we incorporate heterogeneous stage effects. The first extension that can generate the convex wage structure is that the number of workers competing increases with the hierarchical levels. The second explanation is that the returns to effort increase with the hierarchical levels, which cannot generate the convex wage structure unless further assumptions added on optimal effort levels and cost functions. The third chapter investigates the underlying assumption in Chapter 1 that people are inequity averse to ex-ante payoff differentials. Specifically, an online survey is conducted to test whether ex ante or ex post fairness views affect people's decision making in a social context. I find that the ex post fairness views do make an important role in people's decision making. The results of the survey data do not support the model of inequity aversion.
Book Synopsis Essays in Dynamic Contracting by : Suehyun Kwon
Download or read book Essays in Dynamic Contracting written by Suehyun Kwon and published by . This book was released on 2012 with total page 142 pages. Available in PDF, EPUB and Kindle. Book excerpt: This thesis examines three models of dynamic contracting. The first model is a model of dynamic moral hazard with partially persistent states, and the second model considers relational contracts when the states are partially persistent. The last model studies preference for delegation with learning. In the first chapter, the costly unobservable action of the agent produces a good outcome with some probability, and the probability of the good outcome corresponds to the state. The states are unobservable and follow an irreducible Markov chain with positive persistence. The chapter finds that an informational rent arises in this environment. The second best contract resembles a tenure system: the agent is paid nothing during the probationary period, and once he is paid, the principal never takes his outside option again. The second best contract becomes stationary after the agent is tenured. For discount factors close to one, the principal can approximate his first best payoff with review contracts. The second chapter studies relational contracts with partially persistent states, where the distribution of the state depends on the previous state. When the states are observable, the optimal contracts can be stationary, and the self-enforcement leads to the dynamic enforcement constraint as with i.i.d. states. The chapter then applies the results to study the implications for the markets where the principal and the agent can be matched with new partners. The third chapter studies preference for delegation when there is a possibility of learning before taking an action. The optimal action depends on the unobservable state. After the principal chooses the manager, one of the agents may receive a private signal about the world. The agent decides whether to disclose the signal to the manager, and the manager chooses an action. In an equilibrium, the agents' communication strategies depend on the manager's prior. The principal prefers a manager with some difference in prior belief to a manager with the same prior.
Book Synopsis Essays in Optimal Contracting Under Asymmetric Information by : Aaron Miruri Thegeya
Download or read book Essays in Optimal Contracting Under Asymmetric Information written by Aaron Miruri Thegeya and published by . This book was released on 2010 with total page 438 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Essays in Behavioral Economics by : Robert Jean Oxoby
Download or read book Essays in Behavioral Economics written by Robert Jean Oxoby and published by . This book was released on 2000 with total page 276 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Essays in Optimal Contracting Under Asymmetric Information by : Aaron Miruri Thegeya
Download or read book Essays in Optimal Contracting Under Asymmetric Information written by Aaron Miruri Thegeya and published by . This book was released on 2010 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Essays on Dynamic Contracting by : Ilia Krasikov
Download or read book Essays on Dynamic Contracting written by Ilia Krasikov and published by . This book was released on 2019 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: The thesis focuses on understanding the dynamic nature of contracts used in various economic context, specifically financial economics and industrial organization. The first chapter "A Theory of Dynamic Contracting with Financial Constraints'' draws on a large empirical literature documenting that small businesses are financially constrained, and operate at an inefficient level. In the paper, we build a theoretical model where financial constraints arise endogenously as a product of interaction between persistent agency frictions and agent's inability to raise external capital.The paper makes two general points. First, efficiency is a certainty in the long run, and it is achieved through monotone slacking of financial constraints. Second, persistence makes the path towards efficiency much more constrained in comparison to the model with the iid technology. In particular, we show that dynamic agency models with persistence predict a larger cross section of firms in the economy to be financially constrained.At a technical level, we invoke the recursive approach of \citet{aps}, using a two-dimensional vector of promised utilities as a state variable. We show that the optimal contract always stays in a strict subset of the recursive domain termed the shell, and the optimal contract is monotone within this set. We also verify that the results continue to hold in continuous time.The second chapter "Dynamic Contracts with Unequal Discounting'' looks at dynamic screening with soft financial constraints. In contrast to the first paper, the agent can raise money but at a different rate than the principal.We solve for the optimal contract and show that efficiency is not attainable with soft financial constraints. Therefore, the predictions of dynamic models of mechanism design are not robust to the assumption of equal discounting. For the large set of parameters, the optimal contract has the restart property- dynamic distortions are a function of the number of consecutive bad shocks, and once the good shock arrives the process repeats again. We also show that restricting attention to contracts which have the restart property is in general approximately optimal. The endogenous resetting aspect of restart contracts shares features of various contracts used in practice.In the third chapter "On Dynamic Pricing'', we explore dynamic price discrimination, extending a canonical model of monopolistic screening to repeated sales, where a seller uses timing of purchases as a screening instrument. The importance of time as an instrument for price discrimination has been understood since Varian [1989].In the paper, we are aiming to provide a formal analysis of pricing strategies to discriminate amongst consumers based on the timing of information arrival and/or the timing of purchase.A seller repeatedly trades with a buyer. Buyer's valuations for the trade follow a renewal process; that is, they change infrequently at random dates. For the model with two periods, We show that selling the first period good for a spot price and selling the second period good by optioning a sequence of forwards is the optimal pricing strategy. Specifically, at the outset, the seller offers an American option which can be exercised in each of the two periods. Exercising the option grants the buyer with a forward- an obligation to purchase the second period good for a specific price, and a strike price- a right to buy (or not) the good in the second period after learning his value. The buyer with a high valuation exercises the option in the first period, whereas one with a low valuation waits until the second period and then takes a call.We extend the analysis to the general continuous time renewal processes and assess the performance of price discrimination based on American options on forwards:i.optioning forwards is shown to be the deterministic optimum for the sequential screening problem- when the seller makes a sale in a single fixed period;ii.optioning forwards is shown to be the exact optimum for the repeated sales problem in the restricted class of strongly monotone contracts- when allocative distortions are monotone in a whole vector of buyer's valuations;iii.the optimum for the repeated sales problem in the unrestricted class of contracts is shown to be backloaded and a theoretical bound is provided for the fraction of optimal revenue that can be extracted by optioning forwards.Finally, the construction of dynamic pricing mechanism and bounds is ported to study repeated auctions.
Book Synopsis Three Essays on Emerging Issues in Economics by : Rik Chakraborti
Download or read book Three Essays on Emerging Issues in Economics written by Rik Chakraborti and published by . This book was released on 2017 with total page 168 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation contributes three essays to emerging topics in Economics. The first essay examines the role of institutional weaknesses--specifically, weakly defined or enforced property rights--in keeping poor countries heavily dependent on their natural resource base through trade. The essay shows, theoretically and empirically, that a country with weaker property rights will inefficiently under-price its resource base, and export more resource-based goods even to countries that have equally weak property rights. The second essay explores how a firm’s overconfidence about catastrophic environmental risks influences the optimal contract that a regulator writes to reduce the risk at minimal cost. The results show that overconfidence can matter in two important ways: If the firm overestimates the impact of precautionary effort in reducing risk, the optimal contract attains more environmental protection at lower social costs. If the firm, however, underestimates the impact of precautionary effort, the contract is less efficient. Environmental protection is costlier. Moreover, in this case, ignoring the firm’s overconfidence can lead to excessive risk-taking. The third essay explores the interactive economic dynamics of attention and habit formation in the presence of time-inconsistent preferences in mitigating self-control issues. Recent studies in the psychological literature find that self-control is less about resisting unhealthy temptations, and more about breaking unhealthy habits and replacing them with healthy ones. The essay develops a model of habit formation consistent with this observation. A healthy habit in any given domain, in the model, takes a period of sustained attention to form. But, once established, these healthy habits allow an individual to free up scarce \attentional resources," which can then be used to establish healthy habits in other domains. The model has interesting policy implications. It suggests, among other things, that information campaigns or other policies aimed at preventing unhealthy behaviors are best targeted at individuals whose habits are in flux: freshman college students, for example, or people who have recently moved or changed jobs. It also suggests that such policies might have counter-intentional consequences: taxing cigarettes might lead to wide-spread obesity through the channel of cross-domain self-control failures.
Book Synopsis Essays in Applied Microeconomics by : Mitchell H. Hoffman
Download or read book Essays in Applied Microeconomics written by Mitchell H. Hoffman and published by . This book was released on 2012 with total page 127 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation consists of three essays. All are in personnel economics, using data from the trucking industry. Training by firms is a central means by which workers accumulate human capital, yet firms may be reluctant to train if workers can quit and use their gained skills elsewhere. "Training contracts" that impose a penalty for premature quitting can help alleviate this inefficiency. The first essay from this dissertation studies training contracts in the U.S. trucking industry where they are widely used, focusing on data from one leading firm. Exploiting two plausibly exogenous contract changes that introduced penalties for quitting, I confirm that training contracts significantly reduce quitting. To analyze the optimal design of training contracts and their welfare consequences, I develop and estimate a structural learning model with heterogeneous beliefs that accounts for many key features of the data. The estimation combines weekly productivity data with weekly subjective productivity forecasts for each worker and reveals a pattern of persistent overconfidence whereby many workers believe they will achieve higher productivity than they actually attain. If workers are overconfident about their productivity at the firm relative to their outside option, they will be less likely to quit and more likely to sign training contracts. Counterfactual analysis shows that workers' estimated overconfidence increases firm profits by over $7,000 per truck, but reduces worker welfare by 1.5%. Banning training contracts decreases profits by $4,600 per truck and decreases retention by 25%, but increases worker welfare by 4%. Despite the positive effect of training contracts on profits, training may not be profitable unless some workers are overconfident. A robust finding in experimental psychology and economics is that people tend to be overconfident about their ability. However, much less is known about whether overconfidence can be reduced or eliminated, particularly in field settings. The second essay of this dissertation provides new evidence using data from the workplace. A field experiment with a large trucking firm shows that workers tend to systematically overpredict their productivity and that their overconfidence is unaffected by whether workers receive financial incentives of different sizes for accurate guessing. Randomly informing workers about other workers' overconfidence reduces overconfidence in the short-run, but the effect fades within two weeks. Neither the incentives or information treatments have any effect on worker satisfaction or search behavior. Using long-term survey data from a second firm, I show that experience reduces overconfidence, but only quite slowly. Although workers at both firms exhibit aspects of Bayesian updating, overconfidence appears to be sticky and difficult to change. The third essay analyzes worker referrals. Many firms use referrals in their recruitment and hiring procedures. Are these practices profitable, and if so, why? A model is developed where referrals may improve selection and reduce moral hazard. The model is tested using extremely detailed personnel and survey data from a leading firm in the trucking industry. Referred workers are similar to non-referred workers across a large number of background characteristics and lab experimentally-measured dimensions of preferences. Referred workers are between 10-25% less likely to quit; the effects are strong across all groups of drivers, including new workers for whom the firm invests in expensive firm-sponsored general training. However, referred workers attain similar initial productivity and productivity growth as non-referred workers, and are no more likely to engage in various forms of moral hazard. The accumulation of friends after the starting work does not positively affect retention, productivity, or moral hazard. On net, the evidence is consistent with the idea that referrals benefit firms by selecting workers with a better fit for the job, as opposed to selecting workers with higher overall quality, by affecting worker behavior, or by changing job amenities.
Book Synopsis Essays in Dynamic Contracts with Costly State Verification and Limited Commitment by : Francesco Carli
Download or read book Essays in Dynamic Contracts with Costly State Verification and Limited Commitment written by Francesco Carli and published by . This book was released on 2013 with total page 143 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this dissertation I study optimal borrowing contracts in environments with credit markets imperfections and I explore how several institutions can influence the risk of strategic default. Specifically, in the first and in the second essays I study the efficient information production in credit relationships that are repeated over time, while in the third chapter I study the welfare consequences of different settlement arrangements. Information production in static loan contracts is well understood to be useful for resolving incentive problems and contemporaneously enforce contractual obligations: the value of information in a static costly state verification environment is linked to contemporaneous enforcement of the contractual obligations. In a dynamic environment instead, costly monitoring will survive the provision of dynamic incentives if the information produced by the verification process becomes in part independent of the value of monitoring in enforcing repayments. When the interaction between the lender and the borrower is repeated over time, the information about the position of the players in a particular node of the game tree has value to the lender because it allows to limit history dependence, "reset the clock" and avoid that the evolution of history take the game to a node where incentive-compatible continuation contracts entail punishments so severe to become self-defeating (termination). In the third essay I study a model of trading with limited commitment where collateral is used both to provide incentives and to provide insurance to risk averse traders. In economies with bilateral clearing, collateral (i) serves as insurance against counterparty default risk and (ii) guarantees that agents do not strategically default on their obligations. With central clearing, novation of financial contracts and diversification of counterparty default risk within the CCP strictly dominate collateral as an instrument for insurance. Nevertheless, when the CCP cannot observe the characteristics of its members and prices are not fully informative, the incentive problems associated with central clearing are more severe than those associated with bilateral clearing, leading to higher collateral requirements. Therefore, the desirability of Central Counter Party clearing depends on the resolution of this trade-off.
Book Synopsis Essays in Robust Mechanism and Contract Design by : Aleksei Suzdaltsev
Download or read book Essays in Robust Mechanism and Contract Design written by Aleksei Suzdaltsev and published by . This book was released on 2020 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: In this thesis, we propose solutions to three problems in the area of robust mechanism design. The first two problems concern revenue maximization by a seller facing several potential buyers whose knowledge of the probability distribution of buyers' valuations is scarce. The third problem concerns contracting under unknown production technology. More specifically: In Chapter 2 (first substantive chapter), we consider the following model. An indivisible object may be sold to one of n agents who know their valuations of the object. The seller would like to use a revenue-maximizing mechanism but her knowledge of the values' distribution is limited: she knows only the means (which may be different) an upper bound for valuations. Valuations may be correlated. Using a constructive approach based on duality, we prove that a mechanism that maximizes the worst-case expected revenue among all deterministic dominant-strategy incentive compatible, ex post individually rational mechanisms takes the following form: (1) the bidders submit bids; (2) for each bidder, a bidder-specific linear function of the bid is calculated (we call it a ``linear score''); (3) the object is awarded to the agent with the highest score, provided it's nonnegative; (4) the winning bidder pays the minimal amount he would need to bid to still win in the auction. The set of optimal mechanisms includes other mechanisms but all those have to be close to the optimal linear score auction in a certain sense. When means are high, all optimal mechanisms share the linearity property. Second-price auction without a reserve is an optimal mechanism when the number of symmetric bidders is sufficiently high. In Chapter 3, we consider a related problem in which the valuations are constrained to be independent draws from a partially known distribution. The seller knows one or two moments of the distribution. We ask what would be a reserve-price in a second-price auction that maximizes worst-case expected revenue. Using a technique different from Chapter 2, we prove that it is always optimal to set the reserve price to seller's own valuation. However, the maxmin reserve price may not be unique. If the number of bidders is sufficiently high, all prices below the seller's valuation, including zero, are also optimal. In the final chapter, we seek a robust solution of a hidden-action, rather than a hidden-information problem. A principal is uncertain about a technology mapping an agent's effort to the distribution of output. The agent is risk neutral and there is a participation constraint but no limited liability constraint. Transfers can be costly. An example of this setting is the case where the principal is a society trying to properly incentivize a firm to carry out innovation. We first show that when the principal employs minimax-regret criterion in the face of the technological uncertainty, an optimal contract is affine. We then characterize the full set of optimal contracts. A contract is optimal if and only if it lies within certain affine, increasing bounds that collapse to a point when output reaches its maximum value.
