scholarly journals Optimal Contract under Moral Hazard with Soft Information

2013 ◽  
Vol 5 (4) ◽  
pp. 55-80 ◽  
Author(s):  
Guillaume Roger
Keyword(s):  
Moral Hazard ◽  
Adverse Selection ◽  
Soft Information ◽  
Optimal Contract ◽  
Strategic Complements ◽  
Ex Post ◽  
Ex Ante

I study a model of moral hazard with soft information: the agent alone observes the stochastic outcome of her action; hence the principal faces a problem of ex post adverse selection. With limited instruments the principal cannot solve these two problems independently; the ex post incentive for misreporting interacts with the ex ante incentives for effort. This affects the shape and properties of the optimal contract, which fails to elicit truthful revelation in all states. In this setup audit and transfer become strategic complements; this is rooted in the nonseparability of the problem. (JEL D82, D86)

scholarly journals Referrals: Peer Screening and Enforcement in a Consumer Credit Field Experiment

2015 ◽  
Vol 7 (3) ◽  
pp. 174-204 ◽  
Author(s):  
Gharad Bryan ◽  
Dean Karlan ◽  
Jonathan Zinman
Keyword(s):  
South Africa ◽  
Moral Hazard ◽  
Field Experiment ◽  
Empirical Evidence ◽  
Adverse Selection ◽  
Consumer Credit ◽  
Social Pressure ◽  
Theory And Practice ◽  
Ex Post ◽  
Ex Ante

Empirical evidence on peer intermediation lags behind both theory and practice in which lenders use peers to mitigate adverse selection and moral hazard. Using a referral incentive under individual liability, we develop a two-stage field experiment that permits separate identification of peer screening and enforcement. Our key contribution is to allow for borrower heterogeneity in both ex ante repayment type and ex post susceptibility to social pressure. Our method allows identification of selection on repayment likelihood, selection on susceptibility to social pressure, and loan enforcement. Implementing our method in South Africa we find no evidence of screening but large enforcement effects. (JEL D14, D82, G21, O12, O16)

Legal Environment and Contractual Choice

2021 ◽  
Vol 0 (0) ◽  
Author(s):  
Ho Cheung Cheng
Keyword(s):  
Optimal Contract ◽  
Legal Environment ◽  
Gains From Trade ◽  
Legal Systems ◽  
Ex Post ◽  
Ex Ante ◽  
Contractual Choice

Abstract This paper considers contractual choice under imperfect legal systems, in particular, contracts with different timing of payment. Ex-ante payment contracts are risky for the buyer, because the seller may shirk. Ex-post payment contracts are risky for the seller, as the buyer may default. Optimal contract is solved for any given legal environment. Exchanges with lower gains from trade tend to adopt ex-post payment contracts. The seller is a better proposer than the buyer in terms of the efficiency of the proposed contract. Surprisingly, offering ex-ante payment contracts is not strictly better for the seller under any legal environment. Moreover, mixed payment contracts are also analyzed and shown to never be optimal.

The revelation principle and mechanism design

2020 ◽  
pp. 661-719
Author(s):  
David M. Kreps
Keyword(s):  
Mechanism Design ◽  
Adverse Selection ◽  
Optimal Contract ◽  
Gains From Trade ◽  
Revelation Principle ◽  
Ex Post ◽  
The Government ◽  
Role Of The Government

This chapter evaluates a more general attack on optimal contract and mechanism design stressing cases of adverse selection, which makes use of the revelation principle. One should be clear about the uses to which the revelation principle is put. It can be thought of as a statement about how actually to implement contracts. But it may be better to use it with greater circumspection as a tool of analysis for finding the limits of what outcomes can be implemented, without reference to how best to implement a particular outcome. In some contexts of direct revelation, there will be situations ex post where the party in the role of the government knows that it can obtain further gains from trade from one or more of the parties who participated. Meanwhile, in many applications of the revelation principle, the party in the role of mechanism designer must be able to commit credibly to no subsequent (re)negotiation once it learns the types of the parties with which it is dealing.

Epsilon-Efficiency in a Dynamic Partnership with Adverse Selection and Moral Hazard

2021 ◽  
Vol 0 (0) ◽  
Author(s):  
Vi Cao
Keyword(s):  
Moral Hazard ◽  
Adverse Selection ◽  
Incentive Compatibility ◽  
Current Effort ◽  
Bayesian Equilibrium ◽  
Ex Post ◽  
Wide Range ◽  
Division Rule ◽  
Dynamic Partnership ◽  
Division Mechanism

Abstract For a dynamic partnership with adverse selection and moral hazard, we design a direct profit division mechanism that satisfies ϵ-efficiency, periodic Bayesian incentive compatibility, interim individual rationality, and ex-post budget balance. In addition, we design a voting mechanism that implements the profit division rule associated with this direct mechanism in perfect Bayesian equilibrium. For establishing these possibility results, we assume that the partnership exhibits intertemporal complementarities instead of contemporaneous complementarities; equivalently, an agent’s current effort affects other agents’ future optimal efforts instead of current optimal efforts. This modelling assumption fits a wide range of economic settings.

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