Ph.D. Martinez-Gorricho, Silvia

We generalize the disutility of effort function in the linear-Constant Absolute Risk Aversion (CARA) pure moral hazard model. We assume that agents are heterogeneous in ability. Each agent’s ability is observable and treated as a parameter that indexes the disutility of effort associated with the task performed. In opposition to the literature (the “traditional” scenario), we find a new, “novel” scenario, in which a high-ability agent may be offered a weaker incentive contract than a low-ability one, but works harder. We characterize the conditions for the existence of these two scenarios: formally, the “traditional” (“novel”) scenario occurs if and only if the marginal rate of substitution of the marginal disutility of effort function is increasing (decreasing) in effort when evaluated at the second-best effort. If, further, this condition holds for all parameter values and matching is endogenous, less (more) talented agents work for principals with riskier projects in equilibrium. This implies that the indirect and total effects of risk on incentives are negative under monotone assortative matching.

In a two-sided asymmetric information market, the role of the accuracy of consumers’ imperfect and private information on the level of fraud, incidence of fraud and trade under price rigidity is examined. Consumers receive a costless but noisy private signal of quality. The product offered in the market can be of two exogenously given qualities and it is common knowledge that the consumer is not willing to pay a high price for a low quality product. A low quality seller chooses to be either honest (by charging the lower market price) or dishonest (by charging the higher price). We show that equilibria involving fraud exist for all parameter values. Furthermore, for some parameter values, we find that -in equilibrium- a higher precision of consumers’ private information leads to higher levels of fraud and incidence of fraud, reducing consumers’ welfare. We provide conditions for the public revelation of consumers’ private information to be a Pareto improvement.

A principal makes a binary decision based on evidence that can be manipulated by a privately informed agent. The principal’s objective is to minimize the expected loss associated to type I and II errors. When the principal can commit to an acceptance standard, the optimal test features ex-post inefficient standards, to internalize the agent’s manipulation incentives. We provide conditions for the principal to set soft or harsh standards, that is, lower or higher standards, respectively, than the ex-post optimal standard. When misaligned manipulation (i.e., manipulation by the low type) is dominant, the principal sets soft standards when the prior probability that the candidate is low type is relatively small. In contrast, when aligned manipulation (i.e., manipulation by the high type) is dominant, the principal sets soft standards when the prior probability that the candidate is low type is relatively large. In both scenarios, these soft standards result in that the non-commitment equilibrium outcome is Pareto dominated by the equilibrium outcome under commitment. We also provide conditions for the optimal revelation mechanism to Pareto dominate commitment when the prior probability that the agent is low type is relatively large.