Loan Sales and Screening Incentives (with Thomas Gehrig and Rune Stenbacka), CEPR Discussion Paper No. 9084, 2012
We analyze the effect of loan sales on the intensity of costly screening. Loan sales strengthen screening incentives when screening primarily improves the bank’s ability to identify profitable loans and when banks retain most of those profitable loans. However, loan sales dampen screening incentives when the benefit of screening primarily helps to weed out unprofitable projects. Moreover, alternative institutions of information production and the institutional market framework affect the relative benefits and costs of loan sales, and screening respectively. Accordingly, the potential regulation of loan sales has to take into account the whole impact on societal information production, both in markets and non-market institutions.
Exit Options in Incomplete Contracts with Asymmetric Information (with D. Krähmer), SFB/TR15 Discussion Paper 251, (forthcoming in Journal of Economic Theory)
This paper analyzes bilateral contracting in an environment with contractual incompleteness and asymmetric information. One party (the seller) makes an unverifiable quality choice and the other party (the buyer) has private information about its valuation. A simple exit option contract, which allows the buyer to refuse trade, achieves the first--best in the benchmark cases where either quality is verifiable or the buyer's valuation is public information. But, when unverifiable and asymmetric information are combined, exit options induce inefficient pooling and lead to a particularly simple contract. Inefficient pooling is unavoidable also under the most general form of contracts, which make trade conditional on the exchange of messages between the parties. Indeed, simple exit option contracts are optimal if random mechanisms are ruled out.
Signalling Rivalry and Quality Uncertainty in a Duopoly (with Juri Demuth), FUB Discussion Paper Economics 2011/20
This paper considers a market in which only the incumbent’s quality is publicly known. The entrant’s quality is observed by the incumbent and some fraction of informed consumers. This leads to price signalling rivalry between the duopolists, because the incumbent gains and the entrant loses when observed prices make the uninformed consumers more pessimistic about the entrant’s quality. When the uninformed consumers’ beliefs satisfy the ‘intuitive criterion’ and the ‘unprejudiced belief refinement’, only a two–sided separating equilibrium can exist and prices are identical to the full information outcome
Wages and Productivity Growth in A Dynamic Oligopoly (with Chrysovalantou Milliou and Emmanuel Petrakis, SFB/TR 15 Discussion Paper No. 287, November 2009
This paper studies the innovation dynamics of an oligopolistic industry. The firms compete not only in the output market but also by engaging in productivity enhancing innovations to reduce labor costs. Rent sharing may generate productivity dependent wage differentials. Productivity growth creates intertemporal spill–over effects, which affect the incentives for innovation at subsequent dates. Over time the industry equilibrium approaches a steady state. The paper characterizes the evolution of the industry’s innovation behavior and its market structure on the adjustment path.
Investments and the Holdup Problem in a Matching Market, SFB/TR 15 Discussion Paper No. 263, June 2009
This paper studies investment incentives in the steady state of a dynamic bilateral matching market. Because of search frictions, both parties in a match are partially locked–in when they bargain over the joint surplus from their sunk invest-
ments. The associated holdup problem depends on market conditions and is more important for the long side of the market. In the case of investments in homogenous capital only the agents on the short side acquire ownership of capital. There
is always underinvestment on both sides of the market. But when market frictions become negligible, the equilibrium investment levels tend towards the ﬁrst–best.
Delegation and Incentives (with D. Krähmer), CEPR Discussion Paper No. 6042, January 2007 (forthcoming in the Rand Journal of Economics)
This paper analyses the relation between authority and incentives. It extends the standard principal--agent model by a project selection stage in which the principal can either delegate the choice of project to the agent or keep the authority. The agent's subsequent choice of effort depends both on monetary incentives and the selected project. We find that the consideration of effort incentives makes the principal less likely to delegate the authority over projects to the agent. In fact, if the agent is protected by limited liability, delegation is never optimal.
Externalities, Communication and the Allocation of Decision Rights, CEPR Discussion Paper No. DP5391, November 2005 (forthcoming in Economic Theory)
This paper views authority as the right to undertake decisions that impose externalities on other members of the organization. When only decision rights can be contractually assigned to one of the organization's stakeholders, the optimal assignment minimizes the resulting inefficiencies by giving control rights to the party with the highest stake in the organization's decisions. Under asymmetric information, the efficient allocation of authority depends on the communication of private information. In the case of multiple decision areas, divided control rights may enhance organizational efficiency unless there exist complementarities between different decisions.
Externalities and the Allocation of Decision Rights in the Theory of the Firm, CEPR Discussion Paper No. 3276, March 2002
This paper views authority as the right to undertake decisions that have external effects on other members of the organization. Because of contractual incompleteness, monetary incentives are insufficient to internalize these effects in the decision maker's objective. The optimal assignment of decision rights minimizes the resulting inefficiencies. We illustrate this in a principal--agent model where the principal retains the authority to select `large' projects but delegates the decision right to the agent to implement `small' projects. Extensions of the model discuss the role of effort incentives, asymmetric information and multi-stage decisions.