Optimal Contracts, Adverse Selection, and Social Preferences: An Experiment

It has long been standard in agency theory to search for incentive-compatible mechanisms on the assumption that people care only about their own material wealth. However, this assumption is clearly refuted by numerous experiments, and we feel that it may be useful to consider nonpecuniary utility in mechanism design and contract theory. Accordingly, we devise an experiment to explore optimal contracts in an adverse-selection context. A principal proposes one of three contract menus, each of which offers a choice of two incentive-compatible contracts, to two agents whose types are unknown to the principal. The agents know the set of possible menus, and choose to either accept one of the two contracts offered in the proposed menu or to reject the menu altogether; a rejection by either agent leads to lower (and equal) reservation payoffs for all parties. While all three possible menus favor the principal, they do so to varying degrees. We observe numerous rejections of the more lopsided menus, and approach an equilibrium where one of the more equitable contract menus (which one depends on the reservation payoffs) is proposed and agents accept a contract, selecting actions according to their types. Behavior is largely consistent with all recent models of social preferences, strongly suggesting there is value in considering nonpecuniary utility in agency theory.

Financial Markets and Real Ecinomy: Four Essays in International Trade

Financial markets play an important role in an economy performing various functions like mobilizing and pooling savings, producing information about investment opportunities, screening and monitoring investments, implementation of corporate governance, diversification and management of risk. These functions influence saving rates, investment decisions, technological innovation and, therefore, have important implications for welfare. In my PhD dissertation I examine the interplay of financial and product markets by looking at different channels through which financial markets may influence an economy.My dissertation consists of four chapters. The first chapter is a co-authored work with Martin Strieborny, a PhD student from the University of Lausanne. The second chapter is a co-authored work with Melise Jaud, a PhD student from the Paris School of Economics. The third chapter is co-authored with both Melise Jaud and Martin Strieborny. The last chapter of my PhD dissertation is a single author paper.Chapter 1 of my PhD thesis analyzes the effect of financial development on growth of contract intensive industries. These industries intensively use intermediate inputs that neither can be sold on organized exchange, nor are reference-priced (Levchenko, 2007; Nunn, 2007). A typical example of a contract intensive industry would be an industry where an upstream supplier has to make investments in order to customize a product for needs of a downstream buyer. After the investment is made and the product is adjusted, the buyer may refuse to meet a commitment and trigger ex post renegotiation. Since the product is customized to the buyer's needs, the supplier cannot sell the product to a different buyer at the original price. This is referred in the literature as the holdup problem. As a consequence, the individually rational suppliers will underinvest into relationship-specific assets, hurting the downstream firms with negative consequences for aggregate growth. The standard way to mitigate the hold up problem is to write a binding contract and to rely on the legal enforcement by the state. However, even the most effective contract enforcement might fail to protect the supplier in tough times when the buyer lacks a reliable source of external financing. This suggests the potential role of financial intermediaries, banks in particular, in mitigating the incomplete contract problem. First, financial products like letters of credit and letters of guarantee can substantially decrease a risk and transaction costs of parties. Second, a bank loan can serve as a signal about a buyer's true financial situation, an upstream firm will be more willing undertake relationship-specific investment knowing that the business partner is creditworthy and will abstain from myopic behavior (Fama, 1985; von Thadden, 1995). Therefore, a well-developed financial (especially banking) system should disproportionately benefit contract intensive industries.The empirical test confirms this hypothesis. Indeed, contract intensive industries seem to grow faster in countries with a well developed financial system. Furthermore, this effect comes from a more developed banking sector rather than from a deeper stock market. These results are reaffirmed examining the effect of US bank deregulation on the growth of contract intensive industries in different states. Beyond an overall pro-growth effect, the bank deregulation seems to disproportionately benefit the industries requiring relationship-specific investments from their suppliers.Chapter 2 of my PhD focuses on the role of the financial sector in promoting exports of developing countries. In particular, it investigates how credit constraints affect the ability of firms operating in agri-food sectors of developing countries to keep exporting to foreign markets.Trade in high-value agri-food products from developing countries has expanded enormously over the last two decades offering opportunities for development. However, trade in agri-food is governed by a growing array of standards. Sanitary and Phytosanitary standards (SPS) and technical regulations impose additional sunk, fixed and operating costs along the firms' export life. Such costs may be detrimental to firms' survival, "pricing out" producers that cannot comply. The existence of these costs suggests a potential role of credit constraints in shaping the duration of trade relationships on foreign markets. A well-developed financial system provides the funds to exporters necessary to adjust production processes in order to meet quality and quantity requirements in foreign markets and to maintain long-standing trade relationships. The products with higher needs for financing should benefit the most from a well functioning financial system. This differential effect calls for a difference-in-difference approach initially proposed by Rajan and Zingales (1998). As a proxy for demand for financing of agri-food products, the sanitary risk index developed by Jaud et al. (2009) is used. The empirical literature on standards and norms show high costs of compliance, both variable and fixed, for high-value food products (Garcia-Martinez and Poole, 2004; Maskus et al., 2005). The sanitary risk index reflects the propensity of products to fail health and safety controls on the European Union (EU) market. Given the high costs of compliance, the sanitary risk index captures the demand for external financing to comply with such regulations.The prediction is empirically tested examining the export survival of different agri-food products from firms operating in Ghana, Mali, Malawi, Senegal and Tanzania. The results suggest that agri-food products that require more financing to keep up with food safety regulation of the destination market, indeed sustain longer in foreign market, when they are exported from countries with better developed financial markets.Chapter 3 analyzes the link between financial markets and efficiency of resource allocation in an economy. Producing and exporting products inconsistent with a country's factor endowments constitutes a serious misallocation of funds, which undermines competitiveness of the economy and inhibits its long term growth. In this chapter, inefficient exporting patterns are analyzed through the lens of the agency theories from the corporate finance literature. Managers may pursue projects with negative net present values because their perquisites or even their job might depend on them. Exporting activities are particularly prone to this problem. Business related to foreign markets involves both high levels of additional spending and strong incentives for managers to overinvest. Rational managers might have incentives to push for exports that use country's scarce factors which is suboptimal from a social point of view. Export subsidies might further skew the incentives towards inefficient exporting. Management can divert the export subsidies into investments promoting inefficient exporting.Corporate finance literature stresses the disciplining role of outside debt in counteracting the internal pressures to divert such "free cash flow" into unprofitable investments. Managers can lose both their reputation and the control of "their" firm if the unpaid external debt triggers a bankruptcy procedure. The threat of possible failure to satisfy debt service payments pushes the managers toward an efficient use of available resources (Jensen, 1986; Stulz, 1990; Hart and Moore, 1995). The main sources of debt financing in the most countries are banks. The disciplining role of banks might be especially important in the countries suffering from insufficient judicial quality. Banks, in pursuing their rights, rely on comparatively simple legal interventions that can be implemented even by mediocre courts. In addition to their disciplining role, banks can promote efficient exporting patterns in a more direct way by relaxing credit constraints of producers, through screening, identifying and investing in the most profitable investment projects. Therefore, a well-developed domestic financial system, and particular banking system, would help to push a country's exports towards products congruent with its comparative advantage.This prediction is tested looking at the survival of different product categories exported to US market. Products are identified according to the Euclidian distance between their revealed factor intensity and the country's factor endowments. The results suggest that products suffering from a comparative disadvantage (labour-intensive products from capital-abundant countries) survive less on the competitive US market. This pattern is stronger if the exporting country has a well-developed banking system. Thus, a strong banking sector promotes exports consistent with a country comparative advantage.Chapter 4 of my PhD thesis further examines the role of financial markets in fostering efficient resource allocation in an economy. In particular, the allocative efficiency hypothesis is investigated in the context of equity market liberalization.Many empirical studies document a positive and significant effect of financial liberalization on growth (Levchenko et al. 2009; Quinn and Toyoda 2009; Bekaert et al., 2005). However, the decrease in the cost of capital and the associated growth in investment appears rather modest in comparison to the large GDP growth effect (Bekaert and Harvey, 2005; Henry, 2000, 2003). Therefore, financial liberalization may have a positive impact on growth through its effect on the allocation of funds across firms and sectors.Free access to international capital markets allows the largest and most profitable domestic firms to borrow funds in foreign markets (Rajan and Zingales, 2003). As domestic banks loose some of their best clients, they reoptimize their lending practices seeking new clients among small and younger industrial firms. These firms are likely to be more risky than large and established companies. Screening of customers becomes prevalent as the return to screening rises. Banks, ceteris paribus, tend to focus on firms operating in comparative-advantage sectors because they are better risks. Firms in comparative-disadvantage sectors finding it harder to finance their entry into or survival in export markets either exit or refrain from entering export markets. On aggregate, one should therefore expect to see less entry, more exit, and shorter survival on export markets in those sectors after financial liberalization.The paper investigates the effect of financial liberalization on a country's export pattern by comparing the dynamics of entry and exit of different products in a country export portfolio before and after financial liberalization.The results suggest that products that lie far from the country's comparative advantage set tend to disappear relatively faster from the country's export portfolio following the liberalization of financial markets. In other words, financial liberalization tends to rebalance the composition of a country's export portfolio towards the products that intensively use the economy's abundant factors.

Prediction of clinical response after renal angioplasty: respective value of renal Doppler sonography and scintigraphy.

OBJECTIVE: The goal of our study was to compare Doppler sonography and renal scintigraphy as tools for predicting the therapeutic response in patients after undergoing renal angioplasty. SUBJECTS AND METHODS. Seventy-four hypertensive patients underwent clinical examination, Doppler sonography, and renal scintigraphy before and after receiving captopril in preparation for renal revascularization. The patients were evaluated for the status of hypertension 3 months after the procedure. The predictive values of the findings of clinical examination, Doppler sonography, renal scintigraphy, and angiography were assessed. RESULTS: For prediction of a favorable therapeutic outcome, abnormal results from renal scintigraphy before and after captopril administration had a sensitivity of 58% and specificity of 57%. Findings of Doppler sonography had a sensitivity of 68% and specificity of 50% before captopril administration and a sensitivity of 81% and specificity of 32% after captopril administration. Significant predictors of a cure or reduction of hypertension after revascularization were low unilateral (p = 0.014) and bilateral resistive (p = 0.016) indexes on Doppler sonography before (p = 0.009) and after (p = 0.028) captopril administration. On multivariate analysis, the best predictors were a unilateral resistive index of less than 0.65 (odds ratio [OR] = 3.7) after captopril administration and a kidney longer than 93 mm (OR = 7.8). The two best combined criteria to predict the favorable therapeutic outcome were a bilateral resistive index of less than 0.75 before captopril administration combined with a unilateral resistive index of less than 0.70 after captopril administration (sensitivity, 76%; specificity, 58%) or a bilateral resistive index of less than 0.75 before captopril administration and a kidney measuring longer than 90 mm (sensitivity, 81%; specificity, 50%). CONCLUSION: Measurements of kidney length and unilateral and bilateral resistive indexes before and after captopril administration were useful in predicting the outcome after renal angioplasty. Renal scintigraphy had no significant predictive value.

Ecologies of Value in a Wall Street Trading Room

Our task in this paper is to analyze the organization of trading in the era of quantitative finance. To do so, we conduct an ethnography of arbitrage, the trading strategy that best exemplifies finance in the wake of the quantitative revolution. In contrast to value and momentum investing, we argue, arbitrage involves an art of association-the construction of equivalence (comparability) of properties across different assets. In place of essential or relational characteristics, the peculiar valuation that takes place in arbitrage is based on an operation that makes something the measure of something else-associating securities to each other. The process of recognizing opportunities and the practices of making novel associations are shaped by the specific socio-spatial and socio-technical configurations of the trading room. Calculation is distributed across persons and instruments as the trading room organizes interaction among diverse principles of valuation.

Weak and Strong Altruism in Trait Groups: Reproductive Suicide, Personal Fitness, and Expected Value

A simple variant of trait group selection, employing predators as the mechanism underlying group selection, supports contingent reproductive suicide as altruism (i.e., behavior lowering personal fitness while augmenting that of another) without kin assortment. The contingent suicidal type may either saturate the population or be polymorphic with a type avoiding suicide, depending on parameters. In addition to contingent suicide, this randomly assorting morph may also exhibit continuously expressed strong altruism (sensu Wilson 1979) usually thought restricted to kin selection. The model will not, however, support a sterile worker caste as such, where sterility occurs before life history events associated with effective altruism; reproductive suicide must remain fundamentally contingent (facultative sensu West Eberhard 1987; Myles 1988) under random assortment. The continuously expressed strong altruism supported by the model may be reinterpreted as probability of arbitrarily committing reproductive suicide, without benefit for another; such arbitrary suicide (a "load" on "adaptive" suicide) is viable only under a more restricted parameter space relative to the necessarily concomitant adaptive contingent suicide.

Postpacing abnormal repolarization in catecholaminergic polymorphic ventricular tachycardia associated with a mutation in the cardiac ryanodine receptor gene.

BACKGROUND Catecholaminergic polymorphic ventricular tachycardia (CPVT) is an arrhythmogenic disease for which electrophysiological studies (EPS) have shown to be of limited value.OBJECTIVE This study presents a CPVT family in which marked postpacing repolarization abnormalities during EPS were the only consistent phenotypic manifestation of ryanodine receptor (RyR2) mutation carriers.METHODS The study was prompted by the observation of transient marked QT prolongation preceding initiation of ventricular fibrillation during atrial fibrillation in a boy with a family history of sudden cardiac death (SCD). Family members underwent exercise and pharmacologic electrocardiographic testing with epinephrine, adenosine, and flecainide. Noninvasive clinical test results were normal in 10 patients evaluated, except for both epinephrine- and exercise-induced ventricular arrhythmias in 1. EPS included bursts of ventricular pacing and programmed ventricular extrastimulation reproducing short-long sequences. Genetic screening involved direct sequencing of genes involved in long QT syndrome as well as RyR2.RESULTS Six patients demonstrated a marked increase in QT interval only in the first beat after cessation of ventricular pacing and/or extrastimulation. All 6 patients were found to have a heterozygous missense mutation (M4109R) in RyR2. Two of them, presenting with aborted SCD, also had a second missense mutation (I406T- RyR2). Four family members without RyR2 mutations did not display prominent postpacing QT changes.CONCLUSION M4109R- RyR2 is associated with a high incidence of SCD. The contribution of I406T to the clinical phenotype is unclear. In contrast to exercise testing, marked postpacing repolarization changes in a single beat accurately predicted carriers of M4109R- RyR2 in this family.

Heterogeneity as a coordination device

A model of directed search with a finite number of buyers and sellers is considered, where sellers compete in direct mechanisms. Buyer heterogeneity and Nash equilibrium results in perfect sorting. The restriction to complementary inputs, that the match value function Q is supermodular, in addition coordinates the sellers strategies. In that case, equilibrium implements positive assortative matching, which is efficient and consistent with the stable (cooperative equilibrium) outcome. This provides a non-cooperative and decentralizedsolution for the Assignment Game. Conversely, if buyers are identical, no such coordination is possible, and there is a continuum of equilibria, one of which exhibits price posting, another yields competition in auctions.

The genetical theory of social behaviour.

We survey the population genetic basis of social evolution, using a logically consistent set of arguments to cover a wide range of biological scenarios. We start by reconsidering Hamilton's (Hamilton 1964 J. Theoret. Biol. 7, 1-16 (doi:10.1016/0022-5193(64)90038-4)) results for selection on a social trait under the assumptions of additive gene action, weak selection and constant environment and demography. This yields a prediction for the direction of allele frequency change in terms of phenotypic costs and benefits and genealogical concepts of relatedness, which holds for any frequency of the trait in the population, and provides the foundation for further developments and extensions. We then allow for any type of gene interaction within and between individuals, strong selection and fluctuating environments and demography, which may depend on the evolving trait itself. We reach three conclusions pertaining to selection on social behaviours under broad conditions. (i) Selection can be understood by focusing on a one-generation change in mean allele frequency, a computation which underpins the utility of reproductive value weights; (ii) in large populations under the assumptions of additive gene action and weak selection, this change is of constant sign for any allele frequency and is predicted by a phenotypic selection gradient; (iii) under the assumptions of trait substitution sequences, such phenotypic selection gradients suffice to characterize long-term multi-dimensional stochastic evolution, with almost no knowledge about the genetic details underlying the coevolving traits. Having such simple results about the effect of selection regardless of population structure and type of social interactions can help to delineate the common features of distinct biological processes. Finally, we clarify some persistent divergences within social evolution theory, with respect to exactness, synergies, maximization, dynamic sufficiency and the role of genetic arguments.

The value of useless information

There are many situations in which individuals have a choice of whether or notto observe eventual outcomes. In these instances, individuals often prefer to remainignorant. These contexts are outside the scope of analysis of the standard vonNeumann-Morgenstern (vNM) expected utility model, which does not distinguishbetween lotteries for which the agent sees the final outcome and those for which hedoes not. I develop a simple model that admits preferences for making an observationor for remaining in doubt. I then use this model to analyze the connectionbetween preferences of this nature and risk-attitude. This framework accommodatesa wide array of behavioral patterns that violate the vNM model, and thatmay not seem related, prima facie. For instance, it admits self-handicapping, inwhich an agent chooses to impair his own performance. It also accommodatesa status quo bias without having recourse to framing effects, or to an explicitdefinition of reference points. In a political economy context, voters have strictincentives to shield themselves from information. In settings with other-regardingpreferences, this model predicts observed behavior that seems inconsistent witheither altruism or self-interested behavior.

Two-sided learning in New Keynesian models: Dynamics, (lack of) convergence and the value of information

This paper investigates the role of learning by private agents and the central bank(two-sided learning) in a New Keynesian framework in which both sides of the economyhave asymmetric and imperfect knowledge about the true data generating process. Weassume that all agents employ the data that they observe (which may be distinct fordifferent sets of agents) to form beliefs about unknown aspects of the true model ofthe economy, use their beliefs to decide on actions, and revise these beliefs througha statistical learning algorithm as new information becomes available. We study theshort-run dynamics of our model and derive its policy recommendations, particularlywith respect to central bank communications. We demonstrate that two-sided learningcan generate substantial increases in volatility and persistence, and alter the behaviorof the variables in the model in a significant way. Our simulations do not convergeto a symmetric rational expectations equilibrium and we highlight one source thatinvalidates the convergence results of Marcet and Sargent (1989). Finally, we identifya novel aspect of central bank communication in models of learning: communicationcan be harmful if the central bank's model is substantially mis-specified.

Value and prices in Russian economic thought (1890-1920)

The subject "Value and prices in Russian economic thought (1890--1920)" should evoke several names and debates in the reader's mind. For a long time, Western scholars have been aware that the Russian economists Tugan-Baranovsky and Bortkiewicz were active participants to the Marxian transformation problem, that the mathematical models of Dmitriev prefigured forthcoming neoricardian based models, and that many Russian economists were either supporting the Marxian labour theory of value or being revisionists. Moreover, these ideas were preparing the ground for Soviet planning. Russian scholars additionally knew that this period was the time of introduction of marginalism in Russia, and that, during this period, economists were active in thinking the relation of ethics with economic theory. All these issues are well covered in the existing literature. But there is a big gap that this dissertation intends to fill. The existing literature handles these pieces separately, although they are part of a single, more general, history. All these issues (the labour theory of value, marginalism, the Marxian transformation problem, planning, ethics, mathematical economics) were part of what this dissertation calls here "The Russian synthesis". The Russian synthesis (in the singular) designates here all the attempts at synthesis between classical political economy and marginalism, between labour theory of value and marginal utility, and between value and prices that occurred in Russian economic thought between 1890 and 1920, and that embraces the whole set of issues evoked above. This dissertation has the ambition of being the first comprehensive history of that Russian synthesis. In this, this contribution is unique. It has always surprised the author of the present dissertation that such a book has not yet been written. Several good reasons, both in terms of scarce availability of sources and of ideological restrictions, may accounted for a reasonable delay of several decades. But it is now urgent to remedy the situation before the protagonists of the Russian synthesis are definitely classified under the wrong labels in the pantheon of economic thought. To accomplish this task, it has seldom be sufficient to gather together the various existing studies on aspects of this story. It as been necessary to return to the primary sources in the Russian language. The most important part of the primary literature has never been translated, and in the last years only some of them have been republished in Russian. Therefore, most translations from the Russian have been made by the author of the present dissertation. The secondary literature has been surveyed in the languages that are familiar (Russian, English and French) or almost familiar (German) to the present author, and which are hopefully the most pertinent to the present investigation. Besides, and in order to increase the acquaintance with the text, which was the objective of all this, some archival sources were used. The analysis consists of careful chronological studies of the authors' writings and their evolution in their historical and intellectual context. As a consequence, the dissertation brings new authors to the foreground - Shaposhnikov and Yurovsky - who were traditionally confined to the substitutes' bench, because they only superficially touched the domains quoted above. In the Russian synthesis however, they played an important part of the story. As a side effect, some authors that used to play in the foreground - Dmitriev and Bortkiewicz - are relegated to the background, but are not forgotten. Besides, the dissertation refreshes the views on authors already known, such as Ziber and, especially, Tugan-Baranovsky. The ultimate objective of this dissertation is to change the opinion that one could have on "value and prices in Russian economic thought", by setting the Russian synthesis at the centre of the debates.

Consistent solutions in exchange economies: A characterization of the price mechanism

We characterize the Walrasian allocations correspondence by means offour axioms: consistency, replica invariance, individual rationality andPareto optimality. It is shown that for any given class of exchange economiesany solution that satisfies the axioms is a selection from the Walrasianallocations with slack. Preferences are assumed to be smooth, but may besatiated and non--convex. A class of economies is defined as all economieswhose agents' preferences belong to an arbitrary family (finite or infinite)of types. The result can be modified to characterize equal budget Walrasianallocations with slack by replacing individual rationality with individualrationality from equal division. The results are valid also for classes ofeconomies in which core--Walras equivalence does not hold.

Book vs. fair value accounting in banking and intertemporal smoothing

The aim of this paper is to examine the pros and cons of book and fair value accounting from the perspective of the theory of banking. We consider the implications of the two accounting methods in an overlapping generations environment. As observed by Allen and Gale(1997), in an overlapping generation model, banks have a role as intergenerational connectors as they allow for intertemporal smoothing. Our main result is that when dividends depend on profits, book value ex ante dominates fair value, as it provides better intertemporal smoothing. This is in contrast with the standard view that states that, fair value yields a better allocation as it reflects the real opportunity cost of assets. Banking regulation play an important role by providing the right incentives for banks to smooth intertemporal consumption whereas market discipline improves intratemporal efficiency.