The Basel II accord : internal ratings and bank differentiation

The Basel Committee plans to differentiate risk-adjusted capital requirements between banks regulated under the internal ratings based (IRB) approach and banks under the standard approach. We investigate the consequences for the lending capacity and the failure risk of banks in a model with endogenous interest rates. The optimal regulatory response depends on the banks' inclination to increase their portfolio risk. If IRB-banks are well-capitalized or gain little from taking risks, then they will increase their market share and hold safe portfolios. As risk-taking incentives become more important, the optimal portfolio size of banks adopting intern rating systems will be increasingly constrained, and ultimately they may lose market share relative to banks using the standard approach. The regulator has only limited options to avoid the excessive adoption of internal rating systems. JEL Klassifikation: K13, H41

Credit scoring and incentives for loan officers in a principal agend model

We analyze incentives for loan officers in a model with hidden action, limited liability and truth-telling constraints under the assumption that the principal has private information from an automatic scoring system. First we show that the truth-telling problem reduces the bank’s expected profit whenever the loan officer cannot only conceal bad types, but can also falsely report bad types. Second, we investigate whether the bank should reveal her private information to the agent. We show that this depends on the percentage of good loans in the population and on the signal’s informativeness. Though we had to define different regions for different parameters, we concluded that it might often be favorable to not reveal the signal. This contradicts current practice

The impact of liability for malpractice on the optimal reimbursement schemes for health services

We analyze the impact of liability risks for malpractice on the optimal reimbursement schemes for hospitals. In our model, the hospital decides upon two unobservable efforts, a cost reduction effort and a quality improvement effort. We assume that the total effort is positive even without monetary incentives due to some intrinsic motivation, but that motivation is biased towards quality. In our basic model without liability risks, we then find that either a fee-for-service system (FFS) or a fixed-fee prospective payment system (PPS) is optimal, but mixed systems are strictly inferior. With liability risks, mixed systems are in general optimal, and the variable part of costs that should be borne by the hospital is increasing in the degree of the liability risk. This may at least partially explain why countries like Germany where liability risks are low compared to the US have been more reluctant in switching from FFS to PPSprincipal-agent-theory, multi-task, health care, hospital compensation schemes, liability law

Why it Pays to Conceal - On the Optimal Timing of Acquiring Verifiable Information

We consider optimal contracts when a principal has two sources to detect bad projects. The first one is an information technology without agency costs ($$), whereas the second one is the expertise of an agent subject to moral hazard, adverse selection and limited liability ($IT_A$). First, we show that the principal does not necessarily benefit from access to additional information and thereby may prefer to ignore it. Second, we discuss different timings of information release, i.e. a \emph{disclosure} contract offered to the agent after the principal announced the result of $$, and a \emph{concealment} contract where the agent exerts effort before $IT_{P}$ is checked. We find that oncealment is superior whenever the quality of $IT_{P}$ is sufficiently low. Then, $IT_{P}$ is almostworthless under a disclosure contract, while it can still be exploited to reduce the agent''s information rent under concealment. If the quality of $$ improves, disclosure can be superior as it allows to adjust the agent''s effort to the up-dated expected quality of the project. However, even for a highly informative $IT_{P}$, concealment can be superior as itmitigates the adverse selection problem. Finally, we prove that the principal always benefits from checking $IT_P$ \textit{if} he chooses the optimal timing of information release. In particular, he may benefit only if he does not check $IT_P$ until the agent reported his findings.management information;

Patent Licensing and Price Discrimination

We extend the Kamien and Tauman model of patent licensing by introducing heterogeneous licensees that differ in their marginal costs using the licensed technology. We show that price discrimination does not necessarily ensure an efficient allocation of licenses. Moreover, it is possible that more licenses are sold without rather than with price discrimination.Endogenous valuation

Basel II and the Value of Bank Differentiation

This paper analyzes optimal bank capital requirements when regulation can be differentiated according to banks’ heterogeneous risk-assessment capabilities. The new Basel II Accord provides the opportunity to do by introducing distinct regulatory systems for banks authorized to apply internal ratings and externally rated banks.bank capital regulation; capital adequacy; bank competition; risk-taking; Basel Accord; internal ratings

When Bidding More is Not Enough: All-Pay Auctions with Handicaps

We consider a standard two-player all-pay auction with private values, where the valuation for the object is private information to each bidder. The crucial feature is that one bidder is favored by the allocation rule in the sense that he need not bid as much as the other bidder to win the auction. Analogously, the other bidder is handicapped by the rule as overbidding the rival may not be enough to win the auction. Clearly, this has important implications on equilibrium behavior. We fully characterize the equilibrium strategies for this auction format and show that there exists a unique pure strategy Bayesian Nash Equilibrium.All-pay auction, contest, asymmetric allocation rule, rent-seeking, asymmetric information

Legal Restrictions on Buyout Fees: Theory and Evidence from German Soccer

We perform a theoretical and empirical analysis of the impact of transfer fee regulations on professional soccer in Europe. Based on a model on the interaction of moral hazard and heterogeneity, we show (i) how the regulations effect contract durations and wages, (ii) that contracting parties have an incentive to agree upon inefficiently long contracts, (iii) how these incentives vary with the legal system, and (iv) how the relationship between contract duration and performance also depends on the legal system. With one exception, all theoretical results are empirically confirmed using a comprehensive data set from the top German Soccer League ("Bundesliga").regulation of labor markets; long-term contracts; sports economics; breach of contract; empirical contract theory

Unfair Contests

Real-world contests are often "unfair" in the sense that outperforming all rivals may not be enough to be the winner, because some contestants are favored by the allocation rule, while others are handicapped. Examples of such contests can be inter alia found in the area of litigation and procurement.This paper analyzes discriminatory contests (which are strategically equivalent to all-pay auctions) with a handicap for one of the participants. We first characterize the equilibriumstrategies, provide closed form solutions, and illustrate the additional strategic issues arising through this asymmetry. We then analyze the issue of the optimal degree of unfairness. From a social point of view, the following trade-off arises: The disadvantage of unfair contests is that the prize may be awarded to an inferior contestant. On the other hand, under the assumption that the effort exerted by contestants to increase their chancesof winning the prize is wasteful from a social point of view, one advantage of an unfair contest is that it leads to lower effort incentives. We characterize situations in which it is optimal for an authority to either stipulate a fair contest, an interior degree of unfairness or even an infinitely unfair contest where the prize is directly awarded to one of the ontestants.microeconomics ;

Contracts as Rent Seeking Devices: Evidence from German Soccer

Recent theoretical research has identified many ways how contracts can be used as rent seeking devices vis-à-vis third parties, but there is no empirical evidence on this issue so far. To test some basic qualitative properties of this literature, we develop a theoretical and empirical framework in the context of European professional soccer where (incumbent) clubs and players sign binding contracts which are, however, frequently renegotiated when other clubs (entrants) want to hire the player. Because they weaken entrants in renegotiations, long term contracts are useful rent seeking devices for the contracting parties. From a social point of view, however, they lead to allocative distortions in the form of deterring efficient transfers. Since incumbent clubs tend to benefit more from long term contracts in renegotiations than players, these must be compensated ex ante by a higher wage when agreeing to a long term contract. Using data from the German "Bundesliga", our model predictions are broadly confirmed. In particular, our analysis supports the concerns expressed in the theoretical literature about detrimental effects of strategic contracting on allocative inefficiency.strategic contracting, rent seeking, empirical contract theory, long-term contracts, breach of contract, sports economics