A NOTE ON THE PROPERTY RIGHTS THEORY AND THE EX ANTE VALUE OF INFORMATION

This paper examines the ex ante value of information in the property rights model where the possibility exists that an investing agent can be provided with relevant information before investments are undertaken. When contracts are incomplete, from an ex ante perspective, informing the investing agent does not necessarily increase the expected surplus resulting from a relationship between two economic agents. The paper highlights the fact that the second‐best nature of the problem that arises from contractual incompleteness can ensure this.     

On the bad reputation of reputational concerns

Can reputational concerns do any good? Economists have shown how they lead agents to ignore valuable information, to herd, and to become overly risk averse. We explore how they may be a social blessing. An agent may exert effort to become informed about the uncertain benefits of a project. A smart agent's efforts make him better informed; a dumb agent's efforts are to no avail. If an agent does not know his type, reputational concerns are socially beneficial. If an agent knows his type, reputational concerns may be socially beneficial. A dumb agent takes inefficient, unconventional decisions to mimic a smart agent. The latter exerts more effort in order not to be mistaken for a dumb. This holds whether or not project rejection is a safe haven for the dumb.     

Adverse selection,commitment and exhaustible resource taxation

This paper studies the contractual relationship between a government and a firm in charge of the extraction of an exhaustible resource. Governments design taxation scheme to capture resource rent and they usually propose contracts with limited duration and possess less information on resources than the extractive firms do. This article investigates how information asymmetry on costs and an inability to commit to long-term contracts affect tax revenue and the extraction path. This study gives several unconventional results. First, when information asymmetry exists, the inability to commit does not necessarily lower tax revenues. Second, under asymmetric information without commitment, an efficient firm may produce during the first period more or less than under symmetric information. Hence, the inability to commit has an ambiguous effect on the exhaustion date. Third, the modified Hotelling's rule is such that an increase in the discount factor does not necessarily reduce the first-period extraction.     

INFORMATION GATHERING BY A PRINCIPAL*

In the standard principal–agent model, the information structure is fixed. In this article the principal can choose to acquire additional information about the state of the world before he contracts with an agent. In the event that the principal acquires this information, the agent never learns what the principal knows about the state of the world. I examine cases where the agent can and cannot observe whether the principal has acquired the additional information. The implications for risk sharing, information acquisition, investment, and welfare are examined for both cases.     

Reciprocal relationships and mechanism design

We study an incomplete information game in which players can coordinate their actions by contracting among themselves. We model this relationship as a reciprocal contracting procedure where each player has the ability to make commitments contingent on the other players' commitments. We differ from the rest of the literature on reciprocal contracting by assuming that punishments cannot be enforced in the event that cooperation breaks down. We fully characterize the outcomes that can be supported as perfect Bayesian equilibrium outcomes in such an environment. We use our characterization to show that the set of supportable outcomes with reciprocal contracting is larger than the set of outcomes available in a centralized mechanism design environment in which the mechanism designer is constrained by his inability to enforce punishments against non‐participants. The difference stems from the players' ability in our contracting game to convey partial information about their types at the time they offer contracts. We discuss the implications of our analysis for modelling collusion between multiple agents interacting with the same principal.     

Reasoning about knowledge of unawareness

Awareness has been shown to be a useful addition to standard epistemic logic. However, standard propositional logics for knowledge and awareness cannot express the fact that an agent knows that there are facts of which he is unaware without there being an explicit fact that the agent knows he is unaware of. We extend Fagin and Halpern's logic of general awareness to a logic that allows quantification over variables, so that there is a formula in the language that says “an agent explicitly knows that there exists a fact of which he is unaware.” Moreover, that formula can be true without the agent explicitly knowing that he is unaware of any particular formula. We provide a sound and complete axiomatization of the logic. Finally, we show that the validity problem for the logic is recursively enumerable, but not decidable.     

Why it Pays to Conceal: On the Optimal Timing of Acquiring Verifiable Information

Abstract. We consider optimal contracts when a principal has two sources to detect bad projects. The first one is an information technology without agency costs (IT_P), whereas the second one is the expertise of an agent subject to moral hazard, adverse selection and limited liability (IT_A). First, we show that the principal does not necessarily benefit from access to additional information and thereby may prefer to ignore it. Second, we discuss different timings of information release, i.e., a disclosure contract offered to the agent after the principal announced the result of IT_P , and a concealment contract where the agent exerts effort before IT_P is checked. We find that concealment is superior whenever the quality of IT_P is sufficiently low. Then, IT_P is almost worthless under a disclosure contract, while it can still be exploited to reduce the agent's information rent under concealment. If the quality of IT_P improves, disclosure can be superior as it allows to adjust the agent's effort to the updated expected quality of the project. However, even for a highly informative IT_P , concealment can be superior as it mitigates the adverse selection problem.     

Culture and the regulation of entry

Does culture affect the manner in which a society regulates the entry of new firms? Our results suggest it does. We find more individualistic countries regulate entry more lightly. We investigate how culture matters presenting evidence of significant interactions between individualism and formal legal and political institutions. Individualism has a greater impact on entry regulation in societies with democratic political institutions or a common law tradition. This outcome is consistent with the idea that culture influences social preference for regulation, and political and legal institutions determine the degree to which those preferences are expressed as policy outcomes.     

Non-implementation of rational expectations as a perfect Bayesian equilibrium

Summary. We point out several conceptual difficulties of the rational expectations equilibrium concept. In particular we show that such an equilibrium need not be incentive compatible and need not be implementable as a perfect Bayesian equilibrium . A comparison of rational expectations equilibria with the private core is also provided. We conclude that the private core is a more appropriate concept to capture the idea of contracts under asymmetric information.Received: 15 December 2003, Revised: 18 November 2004, JEL Classification Numbers: C71, C72, D5, D82. Correspondence to: Nicholas C. YannelisWe wish to thank Dr A. Hadjiprocopis for his invaluable help with the implementation of Latex in a Unix environment.     

The value of information for auctioneers

An auctioneer wants to sell an indivisible object to one of multiple bidders, who have private information about their valuations of the object. A bidder's information structure determines the accuracy with which the bidder knows her private valuation. The main result of the paper is that the auctioneer's revenue is a convex function of bidders' information structures. One implication is that assigning asymmetric information structures instead of symmetric information structures to bidders is always revenue-enhancing. This paper generalizes a result of Bergemann and Pesendorfer [D. Bergemann, M. Pesendorfer, Information structures in optimal auctions, J. Econ. Theory 137 (2007) 580–609], who show that revenue-maximizing information structures are asymmetric.     

Endogenous Selection of Institutions and Their Exogenous Effects

Institutions shape social outcomes, yet institutions themselves are products of political choices. When institutional choices are determined by the same political and social processes that they shape, institutions are endogenously selected. Here I address the question of whether this endogenous institutional selection necessarily implies endogenous institutional effects. If it does, the use of institutional parameters as independent variables explaining policy outcomes and properties of the resulting political regimes, widespread in the literature on comparative political institutions, is hard to justify. I argue, however, that strategic choice of the rules of the game implies designers' ability to obtain their preferred institutional effects only under conditions of complete information. Under incomplete information, ex-post institutional effects do not need to be endogenous, since at the time of designing the rules the designers were not in position to control the selection of these effects. The reason why the choice of the rules does not imply the choice of their effects lies in the intervening and interactive (rather than additive) role played by the environmental parameters, including players' own characteristics, that are not revealed at the time of the institutional choice. Additionally to the model which illustrates the logic of the argument and the workings of intervening structural effects, I find supporting evidence in the processes of design of election laws in post-communist Europe, where stages of design and implementation followed each other in a very quick succession yet were characterized by substantial changes in manifested institutional preferences of the key political players.     

Renegotiation on incomplete procurement contracts

This article examines the impact of incomplete contracts on procurement costs in road construction auctions. Ex ante contracts in these auctions often fail to specify all of the potential construction contingencies, and consequently, changes in scope are necessary after construction begins. Using Vermont road construction contract data, this study finds evidence that there is a statistically significant difference in costs of firms between auctions with and without extra work adjustments. Substantial adaptation costs are responsible for the higher procurement outlays in incomplete contract. I also find that bidders inflate their bids to incorporate risk premiums in incomplete contracts; however, my estimates suggest that this bidding behaviour does not affect their profit margins.     

Sequential contracting with multiple principals

This paper considers dynamic games in which multiple principals contract sequentially and non-cooperatively with the same agent. We first show that when contracting is private, i.e. when downstream principals do not observe the mechanisms offered upstream and the decisions taken in these mechanisms, all PBE outcomes can be characterized through pure-strategy profiles in which the principals offer menus of contracts and delegate to the agent the choice of the contractual terms. We then show that, in most cases of interest for applications, the characterization of the equilibrium outcomes is further facilitated by the fact that the principals can be restricted to offer incentive-compatible extended direct mechanisms in which the agent reports the endogenous payoff-relevant decisions contracted upstream in addition to his exogenous private information. Finally we show how the aforementioned results must be adjusted to accommodate alternative assumptions about the observability of upstream histories and/or the timing of contracting examined in the literature.     

Optimal Design of Pension Rule with Flexible Retirement: The Two-Type Case

We study a model where the government offers two contracts: either low retirement age, low lifetime benefit or high retirement age, high lifetime benefit. Each worker privately knows whether he has a low or high life expectancy and chooses accordingly. The so-called ``actuarially fair' system – calculated at an average life expectancy – is shown to be not fair: the expectedly shorter-lived subsidize the expectedly longer-lived. Considering optimal design, second-best contracts are separating. Under neutrality, the shorter-lived retire too early with too low a benefit. Under redistribution, the shorter-lived work long enough and receive a high enough benefit to enjoy a higher lifetime utility than under neutrality, although they subsidize the longer-lived.     

Contracts with endogenous information

I study covert information acquisition and reporting in a principal agent problem allowing for general technologies of information acquisition. When posteriors satisfy two dimensional versions of the standard First Order Stochastic Dominance and Concavity/Convexity of the Distribution Function conditions, a first-order approach is justified. Under the same conditions, informativeness and riskiness of reports are equivalent. High powered contracts, that make the agent's informational rents more risky, are used to increase incentives for information acquisition, insensitive contracts are used to reduce incentives for information gathering. The value of information to the agent is always positive. The value of information to the principal is ambiguous.     

Multistage Contracting with Applications to R&D and Insurance Policies

An agent undertakes a nonobservable first‐stage effort. The principal observes whether the effort results in a successful project or not. If the project succeeds, only the firm observes its interim quality, and can further improve it with a nonobservable second‐stage effort. If the agent accepts penalties when the first‐stage fails, moral hazard and asymmetric information do not prevent the principal from implementing her first‐best outcome. However, if the agent is bounded by the maximum loss he can bear when the first‐stage fails (limited liability), the principal induces the agent to exert a first‐stage effort below the first‐best level and a second‐stage effort above the first‐best level when the interim quality of his project is low. This distortion in efforts implies that the ex post rent left to the agent with a project of high interim quality is above the first‐best level. This provides a rationale for the optimality of expanding the use of the “carrot” (second‐stage rent) when the use of the “stick” (first‐stage penalty) is restricted. Implications of the theory for R&D, bank, job, and insurance contracts are discussed.     

Ex ante contracting with endogenously determined communication plans

Summary. In this paper we introduce a new model of ex ante contracting for economies with asymmetric information to examine endogenously determined communication plans for information sharing in the interim stage. In contrast to the models used in previous research, in the present model agents negotiate not only on a contract of state contingent allocations but also on a communication plan, a set of rules describing how agents will reveal part of their private information at the interim stage to execute the trade contracts. We prove a result about the nested structure of the set of allocations implementable by various communication plans and establish the existence of core strategies for this cooperative game under various regularity conditions. Received: 4 March 1998; revised version: 17 September 1999     

Pessimistic information gathering

An agent gathers information on productivity shocks and accordingly produces on behalf of a principal. Information gathering is imperfect and whether it succeeds or not depends on the agent's effort. Contracting frictions come from the fact that the agent is pessimistic on the issue of information gathering, and there are both moral hazard in information gathering, private information on productivity shocks and moral hazard on operating effort. An optimal menu of linear contracts mixes high-powered, productivity-dependent screening options following “good news” with a fixed low-powered option otherwise.     

EFFECTS OF ASYMMETRIC INFORMATION WITHIN A FIRM ON OLIGOPOLISTIC MARKET OUTCOMES

I analyze the implications of the Laffont–Tirole type agency problems on oligopolistic market outcomes. In the model, a firm's marginal cost is decreasing in managerial effort and is subject to an additive shock. Both managerial effort and the realization of the shock are a manager's private information. A firm first offers a menu of contract to its manager, and then competes in the product market. As in the model of single principal and single agent, the incentive contracts implement efforts that are distorted downward relative to full information. In this model, with multiple agency relationships, an additional source for upward distortion of effort emerges as a result of the interaction in the product market. The results are robust to whether firms compete in price or quantity.