Information Acquisition amd Market Power in Credit Markets

Investment in information acquisition can be used strategically by banks as a commitment device to augment market power. A static two-period economy with informationally heterogeneous banks is analyzed. Information acquisition limits asymmetries of information and competitors' rents ex post. If projects yield insufficient returns in the first period, competitors' ex ante break even constraints are tightened, and competition inhibited. Market power can thereby be substantially augmented, and monopoly rents obtained. Welfare is lower with information acquisition, while banks are better off. With more than two banks, information acquisition is characterized by strategic complementarities: hence, multiple equilibria may exist.credit markets, information acquisition, market power

Foreign Direct Investment and Education Investment in Developing Countries

We introduce a model to explain the economic rationale for the observed policy combination of a developing country (hosting foreign direct investment (FDI) through education investment (EDI)) and the interest of a multinational corporation (MNC) in the local labor quality when it contemplates FDI. Information on local labor is the source of a more efficient contract for the MNC with local labor, and the local government can benefit both agents through EDI, FDI, and information sharing. This strategy set is likely to be used by a country in the early stage of economic development. The education level chosen by the local government, however, will be higher than that which maximizes the welfare of local labor. In that sense, the government has the incentive to benefit itself and the MNC at the expense of local labor.International Relations/Trade, Labor and Human Capital,

Community Enforcement with Endogenous Information

We consider cooperative arrangements in a fixed community where agents may change partners over time and where public communication is possible. Public monitoring and exogenous information flows are absent: any player's action in any period is observed only by the agent himself and his partner in that period. We show that cooperation can be sustained as a sequential equilibrium in such an environment if agents are required to make public and simultaneous announcements about their activities even if such announcements are non-verifiable. This result also holds in the presence of small costs of information transmission; however, there may be inefficiencies in such an environment. In the presence of information processing costs, cooperation may be difficult to sustain; however, if there are some exogenous probabilities of a change in the environment, cooperation can be sustained even in the presence of (private and unobservable) costs of gathering information.

Are Contingent Choices Consistent?

A contingent plan is consistent if the specification for any particular contingency in the plan is invariant to the set of alternative contingencies or, equivalently, is independent of irrelevant information emerging from alternative contingencies or choice problems. Our experiments show that consistency may be obtainable when choice problems are complete, with monetary and immediate outcomes, but is likely to face violation in more complex settings. We further found that decisions are more likely to change when irrelevant information arises rather than subsides, and that any observed failure of consistency has the use of irrelevant information in decision-making at its core

Collective Punishments: Incentives and Examinations in Organisations

The paper investigates the impact of examinations on incentives and decision-making in bureaucracies and similar organisations. When one amongst a group of bureaucrats can be appointed to give policy advice whose outcome affects all parties, with advisory ability increasing in personal effort, a free-riding problem is generated if preferences are aligned, leading to an ex ante inefficiency. Free-riding may be mitigated by an examination with a pass-mark, i.e., a minimum ability requirement as a necessary criterion for advisory appointment. By collectively punishing all experts when maximal ability is low, it raises private incentive to enhance ability, and improves decision quality.

Conflict and Consensus: A Theory of Control in Organisations

A principal, requiring a team to implement a project by proposing and jointly executing a technique, may benefit from choosing one with internal disharmony. When superior policy proposition by a member is rewarded with unitary executive control, the benefit of control is increasing in the degree of conflict. Hence, the presence of discord can raise incentives to take effort towards technique proposition by inducing competition for control, and thereby enhance average proposal quality. The principal may thus choose a fractious team when the losses from lower consensus in project execution are limited. These effects can be exacerbated in large teams, and lead to teamwork dominating individual production.

Information Acquisition Under Uncertainty in Credit Markets

This article studies information acquisition through investment in improved risk assessment technology in competitive credit markets. A technology has two attributes: its ability to screen in productive borrowers, and its ability to screen out unproductive borrowers. The two attributes have fundamentally different effects on acquisition incentives and the structure of equilibrium informational externalities between lenders. The article also studies how uncertainty associated with the quality of superior technology affects information acquisition incentives. Uncertainty influences information acquisition even with risk-neutral banks. Increased uncertainty may raise or dampen incentives, depending on whether uncertainty is, respectively, about screening out or screening in quality. Copyright 2005, Oxford University Press.