Hybrid Contests

This paper examines hybrid contests where participants commit two types of resources to improve their probability of winning the prize. The first type is forfeited ex ante, before the prize is allocated, by winners and losers alike, while the second is committed ex ante by all contenders but expended ex post, after the prize is allocated, and only by the contestant that wins the prize. The model yields a number of interesting results. Among them is the finding that, as the number of contestants increases, the ex ante expenditures of individual contestants decrease while the ex post expenditure increases. Even more interesting, the total of the ex ante and ex post expenditures by the contenders in a hybrid contest may decrease with the number of competitors. The study also finds that there is no rent overdissipation, and compares the total expenditures in the contest and “all‐pay” allocation mechanisms.     

Bank Recapitalization,Regulatory Intervention,and Repayment

We use prudential supervisory data for all German banks during 1994–2010 to test if regulatory interventions affect the likelihood that bailed‐out banks repay capital support. Accounting for the selection bias inherent in nonrandom bank bailouts by insurance schemes and the endogenous administration of regulatory interventions, we show that regulators can increase the likelihood of repayment substantially. An increase in intervention frequencies by one standard deviation increases the annual probability of capital support repayment by 7%. Sturdy interventions, like restructuring orders, are effective, whereas weak measures reduce repayment probabilities. Intervention effects last up to 5 years.     

Regulatory Policy Design in an Uncertain World

The paper examines principal–agent relationships in uncertain environments where beliefs of the contracting parties (the regulator and the firm) are represented by sets of probabilities. In addition to fully characterizing the first‐best and the second‐best solutions, we examine optimality of zero‐risk, fixed‐payment schemes and the relationship between the first‐best and the second‐best solutions. In the second‐best world, where the regulator can only contract on the quality of the good, a zero‐risk standard is optimal when the firm has beliefs that are so ambiguous that the firm’s marginal rate of transformation belongs to the set of the firm’s relative probabilities.