Moral hazard and private monitoring

game theory;moral hazard;information

Elections and Macroeconomic Policy Cycles

There is an extensive empirical literature on political business cycles, but its theoretical foundations are grounded in pre-rational expectations macroeconomic theory. Here we show that electoral cycles in taxes, government spending and money growth can be modeled as an equilibrium signaling process. The cycleis driven by temporary information asymmetries which can arise if, for example,the government has more current information on its performance in providing for national defense. Incumbents cheat least when their private informationis either extremely favorable or extremely unfavorable. An exogenous increase in the incumbent partyts popularity does not necessarily imply a damped policy cycle.

Subjective Equilibria under Beliefs of Exogenous Uncertainty

We present a subjective equilibrium notion (called "subjective equilibrium under beliefs of exogenous uncertainty (SEBEU)" for stochastic dynamic games in which each player chooses its decisions under the (incorrect) belief that a stochastic environment process driving the system is exogenous whereas in actuality this process is a solution of closed-loop dynamics affected by each individual player. Players observe past realizations of the environment variables and their local information. At equilibrium, if players are given the full distribution of the stochastic environment process as if it were an exogenous process, they would have no incentive to unilaterally deviate from their strategies. This notion thus generalizes what is known as the price-taking equilibrium in prior literature to a stochastic and dynamic setup. We establish existence of SEBEU, study various properties and present explicit solutions. We obtain the $\epsilon$-Nash equilibrium property of SEBEU when there are many players

Computing value correspondences for repeated games with state variables

La naturaleza de la interaccion repetida ha sido estudiada extensamente en la literatura de juegos repetidos. Abreu (1988), Abreu, Pearce y Stacchetti (1986, 1990) y Cronshaw y Luenberger (1994) desarrollan un enfoque recursivo para caracterizar juegos repetidos centrandose en los valores presentes de estrategias perfectas de subjuegos para cada jugador. Judd y Conklin (1995), Cronshaw y Rutheford (1994) y Cronshaw (1996) han implementado computacionalmente estas tecnicas. Sin embargo, algunos de los ejemplos mas interesantes de interaccion estrategica ocurren en entornos con variables de estado, en los cuales las tecnicas recursivas citadas anteriormente no pueden ser utilizadas. En dichos entornos, el conjunto de valores de equilibrio perfecto de subjuegos se vuelve funcion de la variable de estado. Este trabajo presenta un metodo general para evaluar correspondencias de equilibrio bajo vigilancia perfecta y descuento. (jc) (mac

The Impact of Corporate Reputation on Earnings Management Decisions

This thesis consists of empirical tests and theoretical works exploring how the corporate reputation influences manager’s earnings management decisions. Building and protecting corporate reputation is one of the challenges to CEOs today. Some researchers suggest that corporate reputation is one important factor when investors evaluate a firm. The other scholars indicate that corporate reputation has an impact on manager’s information disclosure and strategies making. Earnings management occurs when managers bias financial reporting or construct transactions strategically to impact the cash flow. I am curious whether the corporate reputation has an effect in earnings management behaviour to mislead investors. Firstly, I test how the corporate reputation affects manager’s earnings management behaviour in both accruals manipulation and real manipulations. I find that firms with worse reputation use more increasing discretionary accruals and intend to manipulate sales. Then, I study the reputation effect on discretionary accruals in a repeated cheap-talk game. I find that for managers in firms without prior good reputation among investors, smoothing earnings is an effective way to alter the investors’ opinion

Information Aggregation and Strategic Trading in Speculative Markets

This paper examines the process by which private information is impounded in security prices in a market where some traders are consistently better informed about short-run asset values. We analyze equilibria where traders can adopt general non-cooperative strategies, and characterize the 'best' attainable equilibrium. Trading strategies in this equilibrium are nonlinear functions of information signals and exhibit history dependence. In contrast to previous papers, competition among informed traders need not lead to rapid revelation of private information. Although the volatility of fundamental prices is constant, transaction prices may exhibit time-varying volatility. Finally, in contrast to linear models, the degree to which prices impound private information depends on the signal itself

Three essays in information and its acquisition

This thesis consists of three essays in economic theory, two on search models with information acquisition and one on repeated games when precise information about discount factors is unavailable. In the first essay, I develop a model in which optimal costly information acquisition by individual firms causes adverse selection in the market as a whole. Each firm’s information acquisition policy determines which customers it serves, which in turn affects the distribution of remaining customers and hence other firms’ incentives. I show that when information acquisition is ‘smooth’, the adverse selection externality due to each firm is dampened, and in equilibrium all firms make positive profits. By contrast, with lumpy information acquisition, only a limited number of firms are profitable. I establish that my results apply to a broad class of continuous-time information acquisition processes. The second essay explores information acquisition in labor markets. Noting that African-Americans face shorter employment durations than similar whites, we hypothesize that employers discriminate in acquiring ability-relevant information. We construct a model with a binary information generating process, ‘monitoring’, at the disposal of firms. Monitoring black but not white workers is self-sustaining. This ‘bad’ equilibrium is not merely a matter of coordination; rather, it is determined by history and not easily reversed. The model’s additional predictions, lower lifetime incomes and longer unemployment durations for blacks, are both strongly empirically supported. In the third essay, we investigate the possibility of repeated games equilibria that are robust to the discount factors. We prove a negative result which shows that a sizable part of the set of feasible individually rational payoffs can never be produced by such equilibria. We find the cutoff defining this region and interpret it as a limit on the ability to punish deviations when future rewards for randomization cannot be finely calibrated. Furthermore, we present a robust folk theorem to support payoffs in the complementary region with strategies that remain Subgame Perfect Nash Equilibria at all greater discount factors

Dynamic equilibrium : game theory, contracts, and search

This thesis comprises three chapters centered on two common themes. The first theme is the application of non-cooperative game theory to economic questions; the second is the study of the kind of arrangements that can arise in the labour market as a response to asymmetric information. The first chapter surveys recent developments in non-cooperative game theory, and then attempts an extension of the recent results characterising perfect equilibrium payoffs in repeated games without discounting to more general games. We choose the dynamic game framework for the generalisation, and shows that there are two jointly, but not indi vidually sufficient condi tions for the generalisation to go through. We then turn to an application of these ideas to the theory of longterm contracts. The main motivation for this is that the view that wages and employment are determined by risk-sharing implicit contracts is now a well established alternative to fixed-price and marketclearing theories. In general, long-term arrangements may mitigate inefficiencies in the short-term contract that arise from various sorts of asymmetric information which are likely to be prevalent in worker-firm relationships. In this chapter two things are attempted; first, we try to integrate the game-theoretic approach to contractinq of Radner with the work of Townshend, Rogerson, Roberts and Manning among others, and second, we characterise the optimal contract, and obtain some new results. The labour market is also the topic of the third chapter. Here, we attempt to extend a well-known model of "frictional" labour market equilibrium to the case where onr or both sides of the market differ in inherent characteristics (e.g. skills) which may be observable or unobservable. We show first that the equilibrium may be inefficient even in the absence of externalities which work through the matching technology. Also, the model with unobservable characteristics provides a framework for a theoretical anal;Tsis of the practice of firms of screening workers by unemployment duration. We show that in our model, there are screening equilibria, and also investigate in some detail the impact of exogenous variables on the equilibrium