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Author : Marco Battaglini
Publisher :
ISBN 13 :
Total Pages : 41 pages
Book Rating : 4.:/5 (254 download)
Download or read book Optimality and Renegotiation in Dynamic Contracting written by Marco Battaglini and published by . This book was released on 2005 with total page 41 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Author : Yahel Giat
Publisher :
ISBN 13 :
Total Pages : 65 pages
Book Rating : 4.:/5 (13 download)
Download or read book Dynamic Contracting Under Imperfect Public Information and Asymmetric Beliefs written by Yahel Giat and published by . This book was released on 2013 with total page 65 pages. Available in PDF, EPUB and Kindle. Book excerpt: We develop a dynamic principal-agent model to show how imperfect public information and asymmetric beliefs about payoff-relevant parameters, agency conflicts, and the agent's implicit incentives to influence the principal's posterior beliefs through his unobservable actions interact to affect optimal dynamic contracts. We make a methodological contribution to the literature by solving the continuous-time contracting problem using a discrete-time approximation approach. We obtain a simple characterization of optimal renegotiation-proof contracts in terms of the solution to a nonlinear ordinary differential equation (ODE). We then exploit the properties of the ODE to derive a number of novel implications for the dynamics of long-term contracts that alter the intuition gleaned from previous literature. Optimism has a first-order impact on incentives, investment and output that could reconcile the "private equity" puzzle. Consistent with empirical evidence, the interaction between asymmetric beliefs, risk-sharing and adverse selection costs could cause the time-paths of the agent's incentive intensities to be increasing or decreasing. Our results also suggest that the incorporation of imperfect public information and asymmetric beliefs could potentially reconcile empirical evidence of an ambiguous relation between risk and incentives, and a non-monotonic relation between firm value and incentives. Permanent and transitory components of risk have differing effects on incentives, which suggest that empirical investigations of the link between risk and incentives should appropriately account for different components of risk.
Author : Marco Battaglini
Publisher :
ISBN 13 :
Total Pages : 50 pages
Book Rating : 4.:/5 (932 download)
Download or read book Optimal Dynamic Contracting written by Marco Battaglini and published by . This book was released on 2015 with total page 50 pages. Available in PDF, EPUB and Kindle. Book excerpt: We study a dynamic principal-agent model in which the agent's types are serially correlated. In these models, the standard approach consists of first solving a relaxed version in which only local incentive compatibility constraints are considered, and then in proving that the local constraints are sufficient for implementability. We explore the conditions under which this approach is valid and can be used to characterize the profit maximizing contract. We show that the approach works when the optimal allocation in the relaxed problem is monotonic in the types, a condition that is satisfied in most solved examples. Contrary to the static model, however, monotonicity is generally violated in many interesting economic environments. Moreover, when the time horizon is long enough and serial correlation is sufficiently high, global incentive compatibility constraints are generically binding. By fully characterizing a simple two period example, we uncover a number of interesting features of the optimal contract that cannot be observed in spatial environments in which the standard approach works. Finally, we show that even in complex environments, approximately optimal allocations can be easily characterized by focusing on a particular class of contracts in which the allocation is forced to be monotonic.
Author : Dean V. Williamson
Publisher :
ISBN 13 :
Total Pages : 66 pages
Book Rating : 4.F/5 ( download)
Download or read book Renegotiation, Dynamic Efficiency, and Vertical Restraints in Electricity Marketing Contracts written by Dean V. Williamson and published by . This book was released on 2003 with total page 66 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Dynamic Contracting, Persistent Shocks and Optimal Taxation written by and published by . This book was released on 2005 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: In this paper I develop continuous-time methods for solving dynamic principal-agent problems in which the agent's privately observed productivity shocks are persistent over time. I characterize the optimal contract as the solution to a system of ordinary differential equations, and show that, under this contract, the agent's utility converges to its lower bound--immiseration occurs. I also show that, unlike in environments with i.i.d. shocks, the principal would like to renegotiate with the agent when the agent's productivity is low--it is not renegotiation-proof. I apply the theoretical methods I have developed and numerically solve this (Mirrleesian) dynamic taxation model. I find that it is optimal to allow a wedge between the marginal rate of transformation and individuals' marginal rate of substitution between consumption and leisure. This wedge is significantly higher than what is found in the i.i.d. case. Thus, using the i.i.d. assumption is not a good approximation quantitatively when there is persistence in productivity shocks.
Author : Ilia Krasikov
Publisher :
ISBN 13 :
Total Pages : pages
Book Rating : 4.:/5 (111 download)
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.
Author : Zehao Hu
Publisher :
ISBN 13 :
Total Pages : 258 pages
Book Rating : 4.:/5 (951 download)
Download or read book Dynamic Contracting with Unobserved Progress written by Zehao Hu and published by . This book was released on 2015 with total page 258 pages. Available in PDF, EPUB and Kindle. Book excerpt: This thesis investigates agency problems in projects whereas the principal cannot effectively monitor the progress. In Chapter 2, the baseline model is studied. It is assumed that the success of innovation requires an intermediate breakthrough and a final breakthrough, but the occurrence of the intermediate breakthrough is privately known to the agent. The principal provides incentives to the agent through a termination date and a reward for the final success. Two properties of optimal contracts are identified. First, conditional on the termination date, the optimal contract induces efficient actions from the agent. Second, the reward for success to the agent is in general non-monotone in success time and later success may be rewarded more. In Chapter 3, I consider several modifications to the modeling assumptions and discuss their implications. First, I study the case that the two breakthroughs need not be in a particular order, and the agent can choose which task to work on first. It is shown that it is optimal to induce the agent to work on the more difficult task first. Second, I consider the scenario where there is an ex ante probability that the project is a bad one and breakthroughs never come. The optimal contract is no longer efficient conditional on the termination date. Last, I allow the principal to receive informative signals on whether the intermediate breakthrough has occurred. In Chapter 4, I extend the baseline model by introducing randomly arriving buyers and apply it to study the financing of startup firms with opportunities to be acquired. I show that the potential acquisition increases the cost of providing incentives. Since an agent with low level of progress is "bailed out" when an offer is made to acquire firms with both high and low levels of progress, the agent has more incentive to shirk. In response, the principal reduces the likelihood that the firm with high level of progress is sold. Moreover, the total financing provided by the principal is less compared to the environment without buyers.
Author : Suehyun Kwon
Publisher :
ISBN 13 :
Total Pages : 142 pages
Book Rating : 4.:/5 (87 download)
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.
Author : Rui Zhao
Publisher :
ISBN 13 :
Total Pages : 224 pages
Book Rating : 4.:/5 (319 download)
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:
Author : John Yiran Zhu
Publisher :
ISBN 13 :
Total Pages : 128 pages
Book Rating : 4.:/5 (769 download)
Download or read book Sticky Incentives and Dynamic Agency written by John Yiran Zhu and published by . This book was released on 2011 with total page 128 pages. Available in PDF, EPUB and Kindle. Book excerpt: I explicitly derive the optimal dynamic incentive contract in a general continuous time agency problem where inducing static first-best action is not always optimal. My framework generates two dynamic contracts new to the literature: (1) a q̀̀uiet-life" arrangement and (2) a suspension-based endogenously renegotiating contract. Both contractual forms induce a mixture of first-best and non-first-best action. These contracts capture common features in many real life arrangements such as ù̀p-or-out", partnership, tenure, hidden compensation and suspension clauses. In applications, I explore the effects of taxes, bargaining and renegotiation on optimal contracting. My technical work produces a new type of incentive scheme I call sticky incentives which underlies the optimal, infrequent-monitoring approach to inducing a mixture of first-best and non-first-best action. Furthermore, I show how differences in patience between the principal and agent factor into optimal contracting.
Author : David Benjamin
Publisher :
ISBN 13 :
Total Pages : 172 pages
Book Rating : 4.:/5 (319 download)
Download or read book Essays on Institutions and Dynamic Contracting written by David Benjamin and published by . This book was released on 2004 with total page 172 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Author : Bo Honoré
Publisher : Cambridge University Press
ISBN 13 : 1108245668
Total Pages : 350 pages
Book Rating : 4.1/5 (82 download)
Download or read book Advances in Economics and Econometrics: Volume 1 written by Bo Honoré and published by Cambridge University Press. This book was released on 2017-11-02 with total page 350 pages. Available in PDF, EPUB and Kindle. Book excerpt: This is the first of two volumes containing papers and commentaries presented at the Eleventh World Congress of the Econometric Society, held in Montreal, Canada in August 2015. These papers provide state-of-the-art guides to the most important recent research in economics. The book includes surveys and interpretations of key developments in economics and econometrics, and discussion of future directions for a wide variety of topics, covering both theory and application. These volumes provide a unique, accessible survey of progress on the discipline, written by leading specialists in their fields. The first volume includes theoretical and applied papers addressing topics such as dynamic mechanism design, agency problems, and networks.
Author : Patrick Bolton
Publisher : MIT Press
ISBN 13 : 9780262025768
Total Pages : 746 pages
Book Rating : 4.0/5 (257 download)
Download or read book Contract Theory written by Patrick Bolton and published by MIT Press. This book was released on 2004-12-10 with total page 746 pages. Available in PDF, EPUB and Kindle. Book excerpt: A comprehensive introduction to contract theory, emphasizing common themes and methodologies as well as applications in key areas. Despite the vast research literature on topics relating to contract theory, only a few of the field's core ideas are covered in microeconomics textbooks. This long-awaited book fills the need for a comprehensive textbook on contract theory suitable for use at the graduate and advanced undergraduate levels. It covers the areas of agency theory, information economics, and organization theory, highlighting common themes and methodologies and presenting the main ideas in an accessible way. It also presents many applications in all areas of economics, especially labor economics, industrial organization, and corporate finance. The book emphasizes applications rather than general theorems while providing self-contained, intuitive treatment of the simple models analyzed. In this way, it can also serve as a reference for researchers interested in building contract-theoretic models in applied contexts.The book covers all the major topics in contract theory taught in most graduate courses. It begins by discussing such basic ideas in incentive and information theory as screening, signaling, and moral hazard. Subsequent sections treat multilateral contracting with private information or hidden actions, covering auction theory, bilateral trade under private information, and the theory of the internal organization of firms; long-term contracts with private information or hidden actions; and incomplete contracts, the theory of ownership and control, and contracting with externalities. Each chapter ends with a guide to the relevant literature. Exercises appear in a separate chapter at the end of the book.
Author : Michael Ryan Roberts
Publisher :
ISBN 13 :
Total Pages : 43 pages
Book Rating : 4.:/5 (891 download)
Download or read book The Role of Dynamic Renegotiation and Asymmetric Information in Financial Contracting written by Michael Ryan Roberts and published by . This book was released on 2014 with total page 43 pages. Available in PDF, EPUB and Kindle. Book excerpt: Using data from SEC filings, I show that the typical bank loan is renegotiated five times, or every nine months. The pricing, maturity, amount, and covenants are all significantly modified during each renegotiation, whose timing is governed by the financial health of the contracting parties and uncertainty regarding the borrowers' credit quality. The relative importance of these factors depends on the duration of the lending relationship. I interpret these results in light of financial contracting theories and emphasize that renegotiation is an important mechanism for dynamically completing contracts and for allocating control rights ex post.
Author : Santiago Moreno-Bromberg
Publisher :
ISBN 13 :
Total Pages : 51 pages
Book Rating : 4.:/5 (13 download)
Download or read book Scale Effects in Dynamic Contracting written by Santiago Moreno-Bromberg and published by . This book was released on 2017 with total page 51 pages. Available in PDF, EPUB and Kindle. Book excerpt: We study a continuous-time contracting problem in which size plays a role. The agent may take on excessive risk to enhance short-term gains; doing so exposes the principal to large, infrequent losses. The optimal contract includes size as an instrument: downsizing along the equilibrium path may be necessary so as to preserve incentive compatibility. We characterize the principal's value function and the downsizing process, both of which depend on the nature of the liquidation value. When the latter has fixed and size-dependent components, there is an optimal (endogenous) liquidation size. In the special case where the liquidation value is linear in size, one may describe the solution in size-adjusted terms, which allows for the study of re-investment. The optimal contract is implemented using the full array of financial securities plus debt covenants; holding equity is essential to curb risk taking. Conflicts emerge between classes of security holders and explain phenomena like seniority of claims. Firms for which risk taking is less attractive can afford a higher leverage.
Author : Oliver Simon D'Arcy HART
Publisher :
ISBN 13 :
Total Pages : pages
Book Rating : 4.:/5 (119 download)
Download or read book CONTRACT RENEGOTIATION AND COASIAN DYNAMIC written by Oliver Simon D'Arcy HART and published by . This book was released on 1987 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Author : Georges Dionne
Publisher : Springer Science & Business Media
ISBN 13 : 1461401550
Total Pages : 1133 pages
Book Rating : 4.4/5 (614 download)
Download or read book Handbook of Insurance written by Georges Dionne and published by Springer Science & Business Media. This book was released on 2013-12-02 with total page 1133 pages. Available in PDF, EPUB and Kindle. Book excerpt: This new edition of the Handbook of Insurance reviews the last forty years of research developments in insurance and its related fields. A single reference source for professors, researchers, graduate students, regulators, consultants and practitioners, the book starts with the history and foundations of risk and insurance theory, followed by a review of prevention and precaution, asymmetric information, risk management, insurance pricing, new financial innovations, reinsurance, corporate governance, capital allocation, securitization, systemic risk, insurance regulation, the industrial organization of insurance markets and other insurance market applications. It ends with health insurance, longevity risk, long-term care insurance, life insurance financial products and social insurance. This second version of the Handbook contains 15 new chapters. Each of the 37 chapters has been written by leading authorities in risk and insurance research, all contributions have been peer reviewed, and each chapter can be read independently of the others.
